What's Next for the Mexican Peso After Best Year Since 1990s
After its strongest year since 1993, the Mexican peso faces possible asymmetric risks in 2026. Learn how carry dynamics and volatility may determine whether the rally continues.
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From Liberation Day Fake-Out to 14% Rally
The Mexican peso posted its strongest year since 1993, appreciating 14% against the dollar throughout 2025. After an early fake-out in April when Liberation Day tariff threats sent USD/MXN spiking, the pair reversed sharply and ground lower for the remainder of the year. What looked like potential policy chaos became instead a story of stable expectations and persistent carry demand.
Low Volatility Let Carry Strategies Work
Three macro factors drove peso strength beyond Mexico's domestic story. First, a prolonged low-volatility environment allowed carry strategies to persist even as global growth concerns lingered. Second, Mexico's high real yields remained attractive despite gradual Banxico rate cuts — the predictable policy path reduced uncertainty rather than undermining confidence. Third, stabilizing global risk sentiment and fewer Fed policy surprises lowered USD funding stress, allowing USD/MXN to trade more on yield differentials than fear.
While Banxico cut rates throughout the year, each move was well-telegraphed. The consistency mattered more than the magnitude. Markets now price in two more Fed cuts in 2026 while expecting Banxico to hold near current levels, potentially widening the carry differential further.
Risk Regime Remains the Gatekeeper
USD/MXN's rolling 12-month correlation with the VIX stays consistently negative, revealing how quickly flows can reverse when volatility arrives. The 2024 comparison proves instructive: that year saw USD/MXN surge 20% as risk appetite deteriorated and carry unwinds accelerated. Analysis shows up days in this pair tend to grind gradually while down moves can be sudden — carry unwinds are structurally asymmetric, favoring sharp dollar rallies during stress periods.
Outlook: Framework Over Forecast
Current fundamentals and technicals could favor continued peso strength, but the setup may carry asymmetric risk. After such an extended move, any meaningful equity market correction could trigger rapid peso depreciation as emerging market flows reverse. Policy sets the bias, but risk sentiment determines direction.
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