Pangea’s VaR estimates that this currency pair could experience up to 21% volatility in 2024*.

The Mexican Peso has been the strongest currency in FX markets over the last two years, gaining over 17% against the dollar since the beginning of 2022. While a majority of analysts are predicting a pullback in 2024, Mexico continues to benefit from higher interest rates and large trade surpluses.

The trend to “deglobalization” has meant that much of the US investment that previously went to China is now headed to Mexico and most agree these flows are more likely than not to grow over time. Mexico is now the 12th largest economy in the world and has displaced China as the US’s biggest trading partner.

Though many analysts believe that Mexico is likely to reduce interest rates starting in March 2024, few expect the cuts to be enough to significantly narrow the rate gap between the US and Mexico, especially since the Fed is expected to cut rates concurrently.

On a technical basis a move higher could increase the peso to 0.06180 (3.88% above current price). Longer term, the next important level of technical resistance is 0.06590 (11.9% above current price.

A historical look at a 2023 USD/MXN hedge creates a compelling case for hedging Peso exposure with forwards while the interest rate differential remains high.

Had a company hedged their USD/MXN cash flows using forwards beginning in January, they would have received over 15% more Pesos per Dollar against the declining spot rate over the year. This was a result of the positive interest rate differential of almost 6.8 percent (forward rates shown in green) and the strengthening Peso (shown in red).

A continuing trend of “near-shoring” and a strong Mexican economy means continued appreciation of the Peso is a risk factor that needs to be considered. With a strong interest rate differential in the buyer’s favor (buying MXN), companies can greatly reduce their current loss exposure at a significant discount using forward contracts. By using Pangea Prime, a company or user with little to no experience with derivatives can begin hedging now.