Written by Noe Torres

MEXICO CITY (Reuters) – Gains in the Mexican peso, which ends 2022 with one of its strongest performances in a decade, may fade in 2023 after an expected end to the Bank of Mexico’s rate hike cycle and a possible recession on top of trade. US partner.

Last month, the peso returned to pre-pandemic levels and rose more than 5% against the US dollar in 2022, making it one of the best-performing global currencies alongside the Brazilian real.

But the peso’s impressive rally may come to an end as markets expect large capital inflows to Mexico in recent months, attracted by the Bank of Mexico’s restrictive monetary policy stance, to slow soon.

Banxico, as the central bank is known, has been increasing its benchmark interest rate since June 2021 to curb inflation, raising it to a record 10.5% at its latest policy meeting.

In the coming months, Banxico is expected to end the cycle of interest rate hikes and possibly break away from the US Federal Reserve, which has been consistently seen to raise interest rates. This would narrow the price differential and could lead to an outflow of capital.

“The carry trade, the phenomenon that (the peso) has benefited from this year, is likely to dissipate a bit,” said James Salazar, an analyst at CI Banco. The carry trade refers to a trading strategy based on taking advantage of the yield differentials between Mexico and other economies.

The peso’s strength, which President Andrés Manuel López Obrador often boasts as one of his government’s major achievements, has benefited from a strong inflow of remittances, growth in exports and foreign direct investment.

Concerns about a recession in the United States and a trade row Mexico is engaging with the United States and Canada over Lopez Obrador’s energy policy, which critics describe as nationalist, souring the peso’s outlook.

Banco Base said that “the perception of risk may rise due to consultations within the framework of the USMCA (trade agreement), which could lead to the imposition of measures against Mexico.”

Traders on the Chicago Mercantile Exchange, who are considered the leaders in market sentiment, began betting that the peso would start to fall.