Mexican peso drops to world's worst currency as investors pull money out

Financial analysts are lowering their year-end predictions for the Mexican peso after it performed worse than all other major currencies over the past month. The currency dropped nearly 6% this month, falling after it reached a two-year high early in September.

Market Shifts

Major financial institutions including Societe Generale, Morgan Stanley, and Banco Base have all lowered their expectations for the peso. This drop happens as carry traders pull their money out of the market. Carry traders borrow money in currencies with low interest rates and invest in ones with higher returns. Brendan McKenna, a strategist at Societe Generale in New York, notes that the peso was vulnerable before this selloff.

Rate Changes

The currency slid after a rate hike from the US Federal Reserve and a decision by Mexico's central bank to hold rates steady. This narrowed the interest-rate gap between the United States and Mexico to its lowest level since at least 2008, cutting the gap in half over the past year. Following Mexico's policy choice to keep rates unchanged on September 24, Societe Generale changed its year-end forecast to 18 pesos per dollar, down from 17.25. Morgan Stanley moved its fourth-quarter forecast to 18.25 pesos per dollar, and Banco Base shifted its estimate to 18.20 pesos per dollar. Gabriela Siller, head of economic analysis at Banco Base, states that the carry trade party is over. Carlos Munoz-Carcamo from Deutsche Bank also notes the carry story is losing appeal, with the bank now forecasting 18.20 pesos per dollar.

Context

Currency markets often react strongly when central banks change interest rates because investors constantly move capital toward higher returns. When the gap between two countries' interest rates shrinks, investors have less incentive to keep money in the higher-yielding currency. This dynamic frequently leads to sharp value drops for emerging market currencies when global economic conditions shift.