Interest Rate:
Mexico's Central Bank has been increasing interest rates. In 2016 it raised the key benchmark rate four times, bringing it to its highest level since 2009. Most recent hikes have been to prop up the currency that has been smitten by Trump's proposed policies against the country. The rule of thumb is that the increasing of a countries benchmark interest rate is done with the intention of combatting inflation, thus strengthening the country's currency.
Inflation
With the weakening of the Mexican Peso, the countries inflation has increased. Goods for the Mexican consumer have become more expensive increasing the level of poverty. There is a silver lining, however. With a weaker currency, Mexico's already competitive exports have been more competitive. Companies from countries with stronger currencies see their exports as a bargain. This being said the Mexican trade surplus will most likely continue to grow. Also the high inflation rate will most lily cause the central bank to continue increasing interest rates
Carry Trade Strategy
With increasing interest rates for the past year, it shows that their central bank is doing what it takes. It is probably the most attractive carry trade against the dollar currently. In today's low-interest-rate environment, there has not been too many out there. These trades are very attracting as the investor is compensated for holding the position. It is caused by the difference in interest rates of the two countries. Since Mexico's interest rate of 6.25 is higher than the US interest rate of .75, investors will be compensated for taking this position.
Even with the dollar once again regaining steam, the Mexican Peso has continued to advance against it. Even today when Yellen's comment weakened other currencies, the peso pared its losses in about two hours and finished once against stronger. Following this trend, in my opinion, is the way to go.
With increasing interest rates for the past year, it shows that their central bank is doing what it takes. It is probably the most attractive carry trade against the dollar currently. In today's low-interest-rate environment, there has not been too many out there. These trades are very attracting as the investor is compensated for holding the position. It is caused by the difference in interest rates of the two countries. Since Mexico's interest rate of 6.25 is higher than the US interest rate of .75, investors will be compensated for taking this position.
Even with the dollar once again regaining steam, the Mexican Peso has continued to advance against it. Even today when Yellen's comment weakened other currencies, the peso pared its losses in about two hours and finished once against stronger. Following this trend, in my opinion, is the way to go.
source: tradingeconomics.com
source: tradingeconomics.com
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