In January, the Mexican peso weakened modestly from 20.496 to 20.655 against the US dollar. As economists at MUFG Bank note, the USD/MXN is set to inch higher amid expected tightening from the Federal Reserve.

MXN tends to gradually depreciate amid Fed policy and local policies

“Even though it seems highly priced in by the market, we assess that the effective monetary policy tightening in the US might further strengthen the US dollar leading to our call of MXN weakening this year.”

“We expect a moderate pace of depreciation once Banxico tends to continue increasing its key policy rate in order to control inflation expectations, which might partially offset the drivers that push MXN to weaker levels.”

“We need to keep monitoring Lopez Obrador protectionist policies, especially in the energy sector. US President Joe Biden’s trade chief is reviewing these policies to see how they relate to the country’s commitments to their 2020 USMCA trade deal.”