Mexican Peso Hits Two-Year High Despite Weak Retail Sales

The Mexican peso climbed to its highest level since May 2024, with the USD/MXN pair currently trading near 16.91613. This move contrasts with Mexico's latest weak retail sales data, which showed a month-over-month decline of 0.6%, far missing the market expectation of a 0.1% rise and weaker than the previous month's 0.2% increase. However, the sharp drop in the U.S. dollar index to near 99.98 has become the dominant force driving the peso's passive strength.

**Weak Dollar Overshadows Domestic Demand Concerns**

The peso's strength does not stem from improvements in Mexico's economic fundamentals but rather from the spillover effect of a broadly weaker U.S. dollar. The dollar index, which measures the greenback against six major currencies, has fallen below the 100 threshold, directly pressuring the USD/MXN exchange rate. Despite improvements in service sector business activity, the unexpected contraction in retail sales still points to insufficient domestic demand momentum in Mexico, a fundamental headwind that is being masked by the systemic depreciation of the dollar.

**Inflation Expectations and Policy Divergence Provide Support**

External factors are also providing additional support for the peso. According to the Financial Times, Boston Fed President Collins said she would vote in favor of a rate hike if inflation remains elevated. This stance reinforces uncertainty over the Fed's policy path, but the market is currently focusing more on how soft CPI data is driving rate cut bets, keeping the dollar under pressure. Meanwhile, the Bank of Mexico's relatively hawkish policy stance keeps the peso attractive in carry trades.

**Short-Term Direction Depends on the Dollar's Path**

The USD/MXN pair has fallen approximately 0.50% this week and has broken below a key support zone on a technical basis. However, whether the peso can hold its current highs still depends on the subsequent direction of the dollar index. If Fed rate cut expectations intensify further, the dollar could continue to weaken, opening greater upside room for the peso; conversely, if the market reprices the Fed's policy path, the peso could face pullback pressure.