The Mexican peso is under renewed pressure after losing nearly 6 percent in September, its weakest monthly performance among the currencies tracked by Bloomberg.
The peso continued falling on October 1, briefly reaching around 18.40 pesos per US dollar and touching its weakest level in almost a year, Bloomberg Línea reports.
Why is the Mexican peso falling?
One major factor is the changing interest rate relationship between Mexico and the United States.
The US Federal Reserve raised interest rates, while Mexico's central bank, Banxico, kept its benchmark rate unchanged on September 24.
According to Bloomberg, the interest rate gap between the two countries has fallen to its smallest level since at least 2008.
That has reduced the attraction of the so called carry trade, where investors borrow money in currencies with lower interest rates and invest in currencies offering higher returns.
The Mexican peso had been one of the currencies benefiting strongly from that strategy.
Analysts cut peso forecasts
Several major financial institutions have now revised their expectations.
Bloomberg reports that Société Générale changed its year end forecast to 18 pesos per dollar, compared with 17.25 previously.
Morgan Stanley revised its fourth quarter forecast to 18.25 pesos per dollar, while Banco Base now expects around 18.20.
The shift is significant because the peso had reached a two year high only in early September.
Strong US dollar adds more pressure
The peso's weakness is also part of a broader move toward the US dollar.
Reuters reports that the dollar has strengthened as rising US Treasury yields increase demand for American assets. The dollar recently reached a 17 month high against the euro, while several other major currencies have also weakened.
For Mexico, investors will now closely watch future decisions from both Banxico and the Federal Reserve.
Any further change in the interest rate gap between the two countries could have an important impact on the USD to MXN exchange rate and determine whether the peso can recover some of its recent losses.
