US-Mexico rate gap drops to record low of 250 bps

The interest rate differential between Banco de México and the US Federal Reserve dropped to a record low of 250 basis points, matching a level not seen since 16 December 2015. The narrowing occurred after the Fed executed its first interest rate increase in three years, lifting its benchmark target range to between 3.75% and 4.0%.

Laura Torres, chief investment officer at IMB Capital Quants, noted that while the spread continues to provide a buffer for carry trade strategies, its appeal is weakening. Torres stated that a smaller spread could lead international portfolio managers to reduce Mexican peso holdings and redirect capital toward US dollar fixed income assets.

On Thursday 17 September, the Mexican peso closed at 17.1706 units per US dollar. The latest Citi Expectations Survey projects the currency to weaken to 17.50 pesos per dollar by year-end 2026, representing an expected depreciation of 1.91%. The survey consensus forecasts that Banxico will hold its policy rate at 6.50% through the end of the year, while the market anticipates one more 25-basis-point hike from the Fed before year-end.

Janneth Quiroz, director of economic, exchange rate, and stock market analysis at Monex, and Luis Gonzali, vice president and co-chief investment officer at Franklin Templeton Mexico, stated that it remains premature to declare an end to the peso's strength, as relative yields still offer support. However, Gonzali noted that if the Fed continues hiking while Banxico stands pat, the spread will narrow further, making an orderly depreciation the most probable year-end outcome.

Market attention also turned to the Bank of Japan, where pricing reflected a 98% probability of a 25-basis-point increase to 1.25%, the highest benchmark rate in over 30 years. Alejandra Cortés, economic analysis manager at Valmex, noted that hawkish guidance could raise yen financing costs and trigger volatility for currencies such as the Mexican peso. According to Banco Base, markets project additional 25-basis-point increases in January and April 2027, potentially taking the Japanese rate to 1.75% within seven months.