The Mexican peso has become the worst-performing major currency over the past month as the structural attractiveness of the carry trade collapses.
The currency depreciated 1.8 percent to 17.95 per U.S. dollar on Monday, marking its weakest level since March. The decline reflects a widening gap between Banco de México policy and Federal Reserve stance: the interest-rate differential that previously supported peso demand has narrowed sharply, reducing the yield advantage of holding peso-denominated assets.
U.S. Treasury yields have climbed above 5 percent, triggering capital repatriation from Mexico. This outflow directly reduces demand for pesos in the spot market, exerting sustained depreciation pressure.
The carry trade—where investors borrow in low-rate currencies and deploy capital in higher-yielding jurisdictions—is losing effectiveness as the rate spread compresses. Investors no longer face a compelling risk-reward to hold Mexican assets, accelerating unwinding of positions.
A stronger U.S. dollar and a shift in risk sentiment are compounding the peso's weakness. Geopolitical tensions have also weighed on the currency.
