FX & Y: The superpeso's next act

Mexico's currency has had an improbably good run. The peso appreciated 15% against the dollar last year, and has continued its run thus far in 2025, printing another 4.5% gain. Yet beneath the superpeso's gleaming surface, the economy it represents looks decidedly less impressive.

Growth has been feeble. GDP expanded just 0.6% in 2025, and the economy contracted outright in the first quarter of this year. American tariffs—first levied under the International Emergency Economic Powers Act, then replaced with duties under Section 122 of the Trade Act—have cast a long shadow over manufacturing, particularly the automotive sector that forms the backbone of Mexico's industrial base. The upcoming USMCA review, set to begin formal negotiations later this month, threatens more disruption still. Washington wants tighter rules of origin and curbs on Chinese transshipment through Mexican factories, a demand that will test President Claudia Sheinbaum's diplomatic nerve.

Foreign direct investment has been equally disappointing. A judicial reform process—begun under Sheinbaum’s predecessor—that replaced appointed judges with elected ones spooked corporate lawyers and boardrooms alike, with private investment in machinery and equipment dropping roughly 16% since August 2024. Despite “friend-shoring” hype to the contrary, greenfield projects remain scarce; investment increasingly comes from brownfield expansions by firms already committed to the country.

Remittances, long an economic stabiliser, have faltered too. Inflows fell 4.6% in 2025—the worst showing in 16 years—as the Trump administration's deportation campaign frightened Mexican workers into keeping their heads down and their wallets shut. Although flows are showing tentative signs of recovery this year, the number of individual transfers has continued to decline. A stronger peso, meanwhile, erodes the purchasing power of every dollar sent home.

Against this dreary backdrop, the Banco de México is expected to deliver what Governor Victoria Rodríguez Ceja called “one last adjustment” today, lowering the policy rate to 6.5%. Having slashed rates from 11.25% over two years but facing core inflation rates stubbornly lodged above 4%, the board now looks set to sit on the sidelines for a prolonged stretch, watching and waiting for price pressures to subside. The central bank does not expect inflation to converge to its 3% target until the second quarter of 2027—a full year later than it forecast just months ago.

These expectations for an extended pause have kept the peso buoyant so far. Even at 6.5%, Mexico's benchmark rate is nearly 275 basis points above the Federal Reserve's and 575 above the Bank of Japan's. Those differentials have sustained the carry trade—the practice of borrowing cheaply in dollars or yen and parking the proceeds in higher-yielding Mexican assets—that has been the single largest driver of peso strength.

Further peso gains are plausible. A smooth USMCA renegotiation would remove the single biggest tail risk hanging over the currency. Renewed dollar weakness, driven by an unwinding of safe-haven flows, could provide additional tailwinds. As long as Banxico keeps rates elevated while growth stays sluggish, the carry trade might keep foreign capital flowing south.

But competition for carry-hungry capital is intensifying. The Brazilian real and Argentinian peso offer attractive yields of their own, and Turkey's lira is drawing speculative flows as real rates tighten. Mexico's advantages—deep liquidity, proximity to the world's largest consumer market, a credible central bank—are real but may be largely priced in after a year and a half of appreciation. They justify holding the peso; they do not obviously justify buying more of it at these levels.

Risks are skewed to the downside. A fractious USMCA renegotiation could trigger a sharp repricing. Should Washington extract meaningful concessions on rules of origin—or, worse, impose snap-back tariffs during the talks—the peso would be exposed. A rebound in volatility, whether from a flare-up in the Middle East or a wobble in American equity markets, might prompt a rapid unwinding of carry positions. And if Mexico's economic weakness deepens, Banxico may find it harder to justify holding rates at 6.5%, removing the very pillar that props the currency up.

The superpeso has had a remarkable run. But currencies that levitate on interest-rate differentials alone, while the economies beneath them sputter, tend to land eventually. Further gains from here would require not just the absence of bad news but the arrival of genuinely good news—a clean trade deal, a revival in investment, a pickup in growth—that is difficult to see under current conditions. The smart money may soon conclude that the superpeso's best act is already behind it.

- Karl Schamotta, Chief Market Strategist, Karl.Schamotta@Corpay.com