Mexican peso fails to get boost from big infrastructure spend

Mexico announces huge new infrastructure plan to aid its slumping economy. Super high real interest rates have been underpinning the peso, hurting the economy.

Mexico’s president announced a sweeping $44 billion plan to spend big on infrastructure, a move that failed Tuesday to bolster the peso, which generally though has been firm in recent months on the back of the highest major economy inflation-adjusted interest rates in the world.

But it is likely central bank Banco de Mexico (BoM) will continue to aggressively ease interest rates, especially now that the economy has officially entered recession territory. On Monday, in a revision to second quarter GDP numbers, it was revealed that in the first half Mexico had indeed slipped into a very slight recession.

Super Wide

So, the super wide Mexico interest rate spread is likely to narrow sharply in coming months, especially now that US Federal Reserve has put its easing on hold. BoM’s official rate was cut by a quarter point earlier this month to 7.5% and is expected to fall as low as 6% in the first half of next year.

BoM has kept interest rates high despite the poor economy in order to stabilize the value of the peso, which has range traded for the last two years but was slaughtered between 2013 and early 2017, losing about 40 percent of its value against the US dollar.

Trade higher

USD/MXN traded about 25 pips higher despite the infrastructure stimulus news for the Mexican economy, changing hands in late New York trade Tuesday around 19.515 pesos. USD/MXN has been range trading for most of the year, with the 19.5 peso level the middle of that range.

President Andres Manuel Lopez Obrador, a leftist who was just elected, has pledged to raise Mexico’s GDP growth to 4%, but a controversial decision to cancel a huge half constructed $13 billion airport in Mexico City and a deep slump in the construction sector, as well as declining output in the key oil sector, have led to widespread skepticism that the president can reach that growth goal.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Start trading forex today

Trade the largest and most volatile financial market in the world.

  • Spreads start at just 0.6 points on EUR/USD
  • Analyse market movements with our essential selection of charts
  • Speculate from a range of platforms, including on mobile

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.