This publication will focus on the near-term outlook for the Mexican Peso and Brazilian Real.
The backdrop is defined by a weakening US dollar, the US Federal Reserve’s expected easing cycle, and local monetary and macroeconomic dynamics in Mexico and Brazil.
The analysis will encompass key economic drivers and risks to frame indicative ranges for both currencies using real time forecasting in Indicio.
Emerging Market Currencies vs US Dollar Year to Date
Amidst a monetary easing backdrop, fiscal and debt concerns, inflation concerns, and risks to growth, the Dollar Index drifted ~10% lower YTD, reflecting broad depreciation pressure. A few factors are:
- Rate easing: 125 bps rate easing from Fed since Sep2024 and futures markets further pricing in 125 bps easing by Q3 2026.
- Higher debt: Currently at ~120% of GDP, much higher than the 105~ pre-Covid.
- GDP growth risks: Fed estimates peg 2025 GDP growth at1.6% vs 2.8% in 2024.
- Labour market slowdown: NFPR with last 3mma at a much lower ~30klevel.
- Breakdown of traditional correlations which earlier supported Dollar strength despite adverse macros
This typically is a supportive environment for emerging market FX rates. Historically, when the Fed eases and the USD weakens, high-carry currencies like the Peso and Real tend to attract inflows, provided global risk appetite holds steady.
Mexican Peso
Mexico’s Contributions to GDP Growth
Insights:
Roughly 80% of total exports go to the US, making it the most significant trading partner.
Growth prospects and Demand in the US therefore directly impacting Mexico GDP and the Peso.
Mexico’s Exports by Region
Insights:
The Peso remains closely tied to Mexico’s sensitivity to the U.S. economy and trade policies.
Exports/GDP stands at ~40% for Mexico, supporting demand for the Mexican Peso as well as growth and employment prospects in Mexico.
Remittances Driving Mexico’s Economy
Insights
Remittances into Mexico are a significant driver of the currency strength.
2024marked ~$65bln remittances into Mexico.
The 10-year average remittances from US alone stand at 96% of total remittances reinforcing the linkages to US economy.
Worker remittances/GDP(%) rose sharply to 3.7% between 2022-24 from 2.7% pre-Covid supporting a strong appreciation in the currency. The recent months have seen it decelerate to 3.3%. On a YoY basis, the remittances marked the fourth consecutive contraction with July at -4.7%.
Mexico’s Remittances: Alternative View
Insights
Compared to the Mean and Median monthly trend values since 2018, Remittances/GDP(%) have been lower since Apr’ 2025.
Foreign Direct Investment Trends in Mexico
Insights
Another significant driver of the Peso has been FDI inflows.
The Peso faced strong appreciation pressure between 2022 and 2024, fueled by a surge in FDI inflows related to nearshoring trends.
FDI flows are relatively more stable in nature vis-à-vis the volatile FPI inflows and augur well for medium term confidence in the currency.
Drivers of the Mexican Peso: Macro Factor Sensitivities
Insights
Quant insight’s macro factor sensitivities highlight Fed rate expectations, Mexican GDP, US GDP, US yields, and Financial market volatility as top factors driving Peso.
Current sensitivities with Fed rate expectations, US 10yr yield, Fed Quantitative tightening expectations and US GDP stand significantly higher than values seen since 2010 implying the growing dominance of US economic sentiment to Mexico’s GDP and currency volatility.
PLEASE NOTE: THIS CHART USES 3rd PARTY DATA VIA MACROBOND, PLEASE REACH OUT TO YOUR ACCOUNT TEAM IF YOU CANNOTACCESS THEM IN THE APP.
Mexican Peso Forecast Outlook
These sensitivities only substantiate our consideration of various explanatory variables when we forecast the Mexican Peso (MXN).
We look at exports to the US, current account trends, inflation and growth differentials, policy rates and financial market volatility as we forecast MXN at 19 by December 2025.
In a bull case, we project the peso to strengthen to 18, and in a bear case, to weaken to 20 with 50% confidence interval.
Brazilian Real
Brazil’s Contributions to GDP Growth
Insights
A relatively different economy from Mexico, Brazil runs a trade deficit with the US, however, remains less reliant on exports to the US compared to Mexico.
Overall exports/GDP stand at ~15% vis-à-vis Mexico’s 40%.
Brazil’s Export Shifts: Regional and Commodity Drivers
Insights
Brazilian Real (BRL) remains highly sensitive to domestic conditions and global financial trends impacting commodity prices.
Reliance on Asia is significantly higher than US: Exports to Asia as a % of Total exports moved higher from 41% to 48% between 2021 and 2023. One third of total exports are to China while Exports to the US have been coming down since 2021and at ~10% currently.
For Brazil, external demand for iron ore, soybeans, and oil have shaped flows in the last few years.
Brazil’s Rising Public Debt Trajectory
Insights
Fiscal headlines remain a potential source of volatility for the Real.
In the past, surge in the Debt/GDP between 2014 (~52%) and 2020 (~88%) brought along sharp depreciation in the Real from 2.4/USD to 5.9/USD.
YTD Jan-Jul the Debt/GDP has moved sharply higher by 2 percentage points to 77.6%.
On the fiscal front, Brazil faces a delicate balancing act. Government spending pressures are building, while debt servicing costs remain high.
Markets will be closely watching the fiscal trajectory especially as we move into the2026 political cycle.
Policy Rates and Currency Performance in the US, Mexico, and Brazil
Insights
YTD appreciation in BRL and MXN amidst a weaker Dollar Index played out amidst divergent monetary policy trends in these economies.
Unlike most global economies, Brazil has seen 450bps interest rate hikes since Sep 2024 bringing the Selic rate at 15% - one of the highest in the emerging markets universe.
This creates a strong carry advantage for the real, especially if the Fed rate continues to drift lower.
Again, estimates of inflation staying above the central bank’s 3 percent target throughout 2025 and into 2026 will likely keep the central bank cautious about easing too quickly.
Brazilian Real Fair Value vs Market Pricing
Insights
BRL has outperformed Quant Insight’s fair value by an average 1st dev YTD, indicating a strong dislocation.
The Real also has also broadly outperformed market pricing indicated by 2 months ahead futures trades delivering attractive carry trades.
Again, 2025 has seen a sharp uptick in R2 for various macro factors in explaining the Real volatility.
PLEASE NOTE: THIS CHART USES 3rd PARTY DATA VIA MACROBOND, PLEASE REACH OUT TO YOURACCOUNT TEAM IF YOU CANNOT ACCESS THEM IN THE APP.
Drivers of the Brazilian Real: Macro Factor Sensitivities
Insights
Quant insight’s macro factor sensitivities highlight financial and rate indicators as Top 7 factors over the conventional macro indicators as seen in Mexico’s case. These substantiate a high Beta story correlated to financial market stability.
The macro factor sensitivities also reflect our view on the external drivers largely from Asia influencing the Real vis-à-vis Emerging market CDS spreads and China story.
PLEASENOTE: THIS CHART USES 3rd PARTY DATA VIA MACROBOND, PLEASE REACH OUT TO YOURACCOUNT TEAM IF YOU CANNOT ACCESS THEM IN THE APP.
Drivers of the Mexican Peso: Macro Factor Sensitivities
Insights
To forecast the Real (BRL), we look at:
- CP Iand growth differentials
- CDS spread
- Oil prices
- Other explanatory variables.
In a base case, the models forecast the Real to end 2025 around 5.5 against the U.S. dollar.
Looking ahead, 2026 could bring more volatility, driven by a mix of macro and election related domestic policy signals, and shifting global conditions.
