The Mexican Peso is weakening ahead of the Bank of Mexico policy meeting.
Mexican labor and trade data beat estimates but only partially recoup MXN’s losses.
USD/MXN completes an ABC correction higher and reaches a critical turning point.
The Mexican Peso (MXN) trades lower on Thursday continuing a run of two straight days of depreciation. The Bank of Mexico (Banxico) monetary policy meeting is scheduled to end at 19:00 GMT with an announcement of the Banxico’s policy decision, a potentially market-moving event for the Peso.
Mexican economic data comes out better than expected on Thursday. The Unemployment Rate remains at 2.6% in May when analysts had expected a rise to 2.7%. The Balance of Trade, meanwhile, edges into surplus territory, with $1.99 billion reading when analysts had expected it to show a deficit, according to data from INEGI. The Peso only appreciates marginally after the good news however before renewing its slide.
At the time of writing, one US Dollar (USD) buys 18.42 Mexican Pesos, EUR/MXN is trading at 19.76, and GBP/MXN at 23.33.
Mexican Peso trades flat after two-day drop
The Mexican Peso trades down in the run-up to the Banxico policy meeting on Thursday. An overwhelming majority of economists expect the central bank to maintain its policy interest rate at its current 11.00% level. Of the 25 economists surveyed by Bloomberg, 23 expect the central bank to keep interest rates unchanged. A recent survey by Mexican lender Citibanamex showed that the majority of respondents expect Banxico to keep its policy rate unchanged – although most expect a cut in August.
The high interest-rate differential between Mexico and most major economies has kept the Mexican Peso strong. Relatively higher interest rates attract greater inflows of foreign capital. Therefore, deciding not to cut interest rates might be bullish for the Peso, although given that this outcome has been widely predicted, the market may already have priced it in.
Many analysts have changed their minds about Banxico cutting interest rates due to the sharp depreciation in the Peso after the June 2 election. They now see imported inflation as a factor further weighing against immediate interest-rate cuts.
Rabobank’s Senior Strategist Christian Lawrence was one analyst who expected Banxico to cut interest rates in June. However, he changed his opinion in light of the sharp devaluation of the Mexican Peso since the election, which “has acted as a de facto cut.”
The same goes for economists at Standard Chartered: “We now expect Banco de México (Banxico) to stay on hold instead of cutting by 25bps at its 27 June meeting, amid sharp currency depreciation driven by elevated political noise and fiscal uncertainty,” said the bank in a recent note.
Technical Analysis: USD/MXN completes ABC correction and reaches crossroads
USD/MXN has completed an ABC corrective pattern higher on the 4-hour chart.
The pair is now at a critical juncture. If it continues to make higher highs, it could mean the short-term downtrend has reversed. Alternatively, a recapitulation would suggest the downtrend is resuming, and the pair could move to lower lows.
USD/MXN 4-hour Chart
A move below 18.06 (June 26 low) would suggest the downtrend was resuming and probably see a continuation down to 17.87 (June 24 low).
At the same time, the short-term trend remains bearish, leaving the pair at risk of a recapitulation lower. Further weakness could see it reach the 17.72 swing low made on June 4.
Alternatively, if USD/MXN rallies and breaks above 18.39 (June 26 high), it would form a higher high and suggest a new short-term uptrend was evolving. Resistance at 18.48 (2023 October 6 high) and 18.68 (June 14 high) might supply upside targets afterward.
The direction of the long and intermediate-term trends remains in doubt.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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