Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate?

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The fact that Mexican interest rates are normally substantially higher than U.S. interest rates implies that the Mexican peso is expected to depreciate against the U.S. dollar in terms of spot rate in the future. This is because investors tend to demand a premium when investing in countries with higher perceived risk or instability thus driving up their return on investment by compensating for such additional risks involved .

As a result, it would be wise to use forward rate as an indicator of potential spot currency exchange rate as it serves more accurate representation due its ability account for any current expectations amongst traders/investors buying selling currencies market.

Therefore if observing increase differential between Mexican US interests around same time then likely expect depreciation pesos relative its American counterpart near term providing plenty opportunities profit taking through smartly leveraging this knowledge