Explainer-The super peso is back — and it's starting to hurt

By Stefanie Eschenbacher and Noe Torres

MEXICO CITY, Aug 25 (Reuters) - Almost nobody ‌saw this coming. At the ​start of 2025, ​Mexico's central bank and Wall Street alike expected the peso to weaken toward 21 per dollar.

Instead, it has surged past 17, making it one of the best-performing emerging market currencies despite sluggish economic growth and persistent trade tensions with Washington.

The rally has revived talk of the "super peso". But for an economy that sends more ‌than 80% of its exports to the United States, a stronger currency is becoming a mixed blessing, already squeezing the margins of some exporters.

WHY ⁠HAS THE CURRENCY BEEN DUBBED THE 'SUPER PESO'?

Mexico's currency was trading at below 17 pesos per dollar on Tuesday, capping a near-20% surge against the dollar since January 2025, LSEG data showed.

The peso is one of the most-traded emerging market ‌currencies.

WHAT IS DRIVING THE RALLY?

The peso has been supported ‌by several factors — chief among them a softer dollar. Having shed more than 10% against a basket of major currencies in 2025, the dollar has largely stabilized this year.

"(The peso) is not unusually strong compared to other emerging market currencies," said Graham Stock, senior sovereign strategist at RBC BlueBay Asset Management. "The dollar has been weak compared to previous cycles."

Carry-trade inflows have ​also helped, with investors drawn to Mexico's relatively high interest rates, liquid markets and easy access to local assets from stocks to bonds.

The central bank's benchmark rate has been at around 7%, compared with about 3.75% for the U.S. Federal Reserve. The currency tends to benefit when investors are willing to take on risk and the dollar is weak, although those ⁠flows can reverse quickly if rate differentials narrow or sentiment deteriorates.

IS IT MORE THAN JUST A DOLLAR STORY?

If the peso's strength were purely a result of dollar weakness, it would be rising in tandem with other currencies. Instead, it has also gained ​against major currencies such as the Swiss franc.

That was "a sign that domestic factors, not just broad dollar weakness, are at play," said Alejo Czerwonko, chief investment officer for emerging markets at UBS Global Wealth Management, pointing to lower trade-risk premia, political stability and solid macroeconomic conditions.

Some investors ​also view Mexico as a beneficiary of the global AI boom. S&P Global estimates computer server exports reached ‌nearly $83 billion in the first half of 2026, highlighting Mexico's growing role in higher-value manufacturing.

"Mexico appears to be moving up the value chain into an advanced technology hub," said Derek Halpenny, European head of Global Markets Research at MUFG.

WHO WINS AND WHO LOSES FROM THE SUPER PESO?

A strong peso ⁠is bound to squeeze exporters while lowering costs for importers.

Several companies, including Becle, which makes José Cuervo tequila, bread producer Grupo Bimbo, Carlos Slim's Grupo Carso, Grupo Industrial Saltillo and stock exchange operator Bolsa Mexicana de Valores, reported that currency strength weighed on their performance in the latest quarter.

Valeria Moy, director of the Mexican Institute for Competitiveness, said the peso's appreciation is becoming a delicate issue for many companies, particularly those whose exports ⁠are concentrated in the United States, exposing their dependence on a single market.

Yet the impact remains difficult to spot in the broader data. "Exports keep growing impressively," Moy said.

WHO ARE THE INVESTORS PILING INTO MEXICO?

Not all money ​flowing into a currency is created equal — and that can shape how long a rally lasts.

Marco Oviedo, economist and senior strategist for Latin America at XP Investments, said that after Mexico's 2024 election many long-term investors, such as pension funds and insurers, stepped back from the peso and have largely stayed away.

Recent gains, he argued, have been fueled primarily by "fast money" investors, including hedge funds and short-term traders, rather than by ‌the return of longer-term institutional buyers.

Data on U.S. Commodity Futures Trading Commission leveraged fund positioning, which tracks speculative bets in currency futures markets, shows the four-week average of net long peso positions approaching the highest levels seen since early 2023.

WHAT IS THE BIGGEST RISK TO THE RALLY?

Investors, strategists ‌and economists across the board flag uncertainty surrounding trade policy as the biggest drag.

"There's been clear uncertainty around how the trade relationship plays out, what the USMCA will bring, and that's not been resolved," said Stock.

The ⁠administration of U.S. President Donald Trump declined to renew the trilateral USMCA trade ‌pact with Canada and Mexico for a new 16-year term, ​instead triggering annual reviews that leave the agreement in force but prolong uncertainty over its future.

Beyond trade uncertainty, some analysts warned that crowded speculative positioning could leave the peso vulnerable to a sharp reversal if investors begin unwinding long positions.

(Reporting by Stefanie Eschenbacher and Noe Torres, editing by Emily Green, Karin ‌Strohecker and Aurora Ellis)

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