MediumIV Macro Policy & Sovereign Debt29 September 2026, Tuesday
Mexican peso weakens past 18 to the dollar as rate gap narrows
USD/MXN rose 0.29% to 18.04 on 29 September, moving above 18 for the first time since early April. The peso had lost 1.74% a day earlier; the interest rate gap between Banxico and the Fed has narrowed to 2.5 points.
According to the Rio Times market summary dated 29 September, the peso lost 1.74% against the dollar on 28 September to close at 17.99. That was its weakest close since late March. The same day the Brazilian real fell 0.86% to 5.2255, the Chilean peso 0.71% to 968.37 and the Colombian peso about 1.5% to 3,362. The Rio Times attributed the sell-off to 2 factors: the rise in the US 10-year yield to 5.244%, and the rejection of Iran's peace proposal pushing up the oil price.
FXStreet reported on 29 September that USD/MXN rose to 18.04 the same day. Banxico's policy rate stands at 6.50% and the Fed's rate range at 3.75–4.00%. The gap between them has narrowed to 2.5 points; at its post-pandemic peak it was about 6 points. A carry trade borrows at low rates to invest in a higher-yielding currency, and the narrowing gap makes it less attractive. According to the Rio Times, Banxico Governor Victoria Rodríguez Ceja said the floating exchange rate acts as a buffer against external shocks. She gave no signal of intervention.
Talay assessment
Bottom line
The Fed's hiking cycle and US yields above 5.2% are eroding the interest rate gap, the strongest support for Latin American currencies. As Banxico says it will not intervene, the peso becomes more sensitive to US data. If the Fed hikes again at the end of October, a second wave of selling in the region's currencies is likely.
Likely effects
- Latin American capital flowsNegativeWeeks
The narrowing of the rate gap to 2.5 points leads carry trades to unwind; volatility rises in the peso, the real and the Colombian peso.
- Mexican inflationNegative1–6 months
The peso moving above 18 raises the prices of imported goods and narrows Banxico's room to ease.
- TürkiyeNegativeWeeks
The unwind in emerging market currencies that rely on carry trades could also increase caution towards lira assets, which depend on similar flows.
Possibilities, ranked
- 1Controlled weakening55%
The peso fluctuates in a 17.8–18.3 range, and Banxico maintains its rate and its non-intervention stance.
Watch: The Banxico FIX rate and Mexico's manufacturing PMI on 1 October
- 2Sell-off deepens30%
With strong US data and an October hike, USD/MXN tests 18.68, the peso's 52-week low.
Watch: PCE data on 30 September and the FOMC decision on 28 October
- 3Recovery15%
The oil price and US yields retreat, and the peso returns below 17.7.
Watch: The US 10-year yield falling below 5%
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- USD/MXN, 29 September▲ 18.04
- Peso loss, 28 September▼ −1.74%
- Banxico–Fed rate gap▼ 2.5 points
- USD/BRL, 28 September▲ 5.2255