The peso closed January at 17.15 per dollar. It started 2025 at 20.50.
That is a 16% appreciation in 13 months, during a period when Banxico cut rates 300 basis points, remittances fell for the first time in over a decade, GDP growth was essentially flat, and the US administration imposed tariffs on Mexican imports. By any conventional framework, the peso should be weaker. It is not.
The international financial press has largely ignored this. When the peso weakened from 17 to 20 in early 2025, there was no shortage of commentary about the end of the super-peso era. The subsequent recovery has generated almost no coverage. We think this is the most important macro signal in Mexico right now, and understanding why it is happening matters more than any single earnings report.
The carry trade is still paying
Banxico paused its easing cycle on February 5, holding at 7.0% unanimously. The Fed sits at 3.50 to 3.75%. That 325 basis point spread is narrower than the 550 basis points of early 2025, but it remains one of the widest carry differentials available in emerging markets. For foreign investors parking capital in CETES or short-duration MBonos, the real yield after inflation is positive and attractive.
The conventional worry is that carry trades unwind violently. They can. But Mexico’s carry has a structural anchor that most EM currencies lack: the trade surplus with the United States. Mexico exported more to the US than any other country in 2025, and the bilateral trade balance generates a steady, structural flow of dollars into Mexico that does not depend on portfolio capital. This is not the same as Turkey or South Africa, where carry trades are funded entirely by hot money.
USD/MXN vs. Banxico-Fed rate differential, Jan 2025 to Feb 2026
Source: Banxico, Federal Reserve, Bloomberg. Differential calculated as Banxico target rate less upper bound of Fed funds target range. End-of-month values.
The chart tells the story visually. The peso appreciated steadily throughout 2025 even as the rate differential compressed by 225 basis points. The implication: something beyond the carry trade is supporting the currency.
Remittances are falling, but that is not the peso story you think it is
Remittances to Mexico totaled USD 61.8 billion in 2025, a 4.6% decline and the first annual drop in over a decade. The narrative is straightforward: stricter US immigration enforcement, weaker US labor markets, and the strong peso itself reducing the purchasing power of dollar transfers for Mexican families.
This is a real concern for household consumption in remittance-dependent states like Guanajuato, Michoacan, and Jalisco. But it is not a peso story. Remittances are received in dollars and converted to pesos, so lower remittance volumes marginally reduce dollar supply in Mexico. Yet the peso strengthened anyway. The explanation is that remittances, while large in absolute terms (3.4% of GDP), are dwarfed by trade flows and portfolio investment as determinants of the exchange rate.
What is actually supporting the peso
Three structural factors, in order of importance:
Trade flows. Mexico’s position as the largest US trading partner creates a permanent bid for pesos. Exporters earn dollars and convert to pesos to pay domestic costs. This flow is largely insensitive to interest rate differentials and portfolio sentiment. As long as Mexican manufacturing remains competitive, which USMCA-compliant supply chains and USD 4.90 per hour wages ensure, this support persists.
FDI. Record FDI of USD 40.9 billion in 2025, with new investment more than doubling to USD 7.4 billion. Foreign direct investment is the stickiest form of capital inflow: once a factory is built, the capital does not leave when spreads narrow by 25 basis points. The nearshoring pipeline is converting announcements into disbursed investment, and each dollar that arrives and stays adds to the structural peso bid.
Banxico credibility. The unanimous February pause sent a clear signal: Banxico will not chase the Fed or sacrifice inflation credibility for short-term growth. Core inflation at 4.47% is above target, and the board pushed back its convergence timeline to Q2 2027. This is hawkish discipline. For carry traders, the signal is that Mexican real rates will remain positive for longer than the market expects.
What could break this
The peso’s structural supports are real, but they are not invincible. Three risks deserve monitoring:
USMCA renegotiation. The July 2026 review is the single largest risk event for the peso this year. A contentious negotiation that introduces uncertainty about Mexico’s trade access to the US market would directly undermine the trade flow support that anchors the currency. We covered this in detail in our January 31 article on what investors should expect from the review.
Carry unwind via Japan. The Bank of Japan raised rates to 0.75% in December 2025 and is expected to continue tightening. The MXN/JPY carry trade, which has been a meaningful source of peso demand, is vulnerable if the BoJ surprises with faster hikes. The current Mexico-Japan rate differential of 625 basis points provides significant cushion, but carry unwinds do not happen gradually.
Fiscal deterioration. Mexico’s fiscal deficit widened in 2025, partly due to Pemex-related transfers. If the market begins to question fiscal sustainability, the peso’s structural premium could erode regardless of interest rate levels. This is the Brazil playbook: strong carry, weak fiscal, eventual currency pressure.
The bottom line
The peso’s stability is not an accident, and it is not fragile. It is built on trade flows, sticky FDI, and a credible central bank. These supports will survive a 25 basis point rate cut. They will survive a modest decline in remittances. They would not survive a USMCA collapse.
For investors, the implication is clear: do not short the peso on rate cut expectations alone. The conventional EM playbook of “rate cuts equal currency weakness” does not apply cleanly to Mexico right now. The structural dollar supply from trade and investment is too large, and Banxico is too disciplined, for the carry trade to be the marginal price setter.
The peso is holding. That is the story.