Mexican Peso remains down despite bouncing back from risk aversion lows

Mexican Peso weakens by 0.50% against the US Dollar, reacting to global safe-haven flows triggered by Middle East tensions.
Banxico Deputy Governor Jonathan Heath signals potential rate stability, projecting 2-4 cuts in upcoming policy meetings.
Heath suggests a more balanced exchange rate of around 17.00, easing fears of excessive Peso volatility.

The Mexican Peso remains on the defensive after plummeting close to 5% against the US Dollar during the overnight session for North American traders. Newswires that Israel attacked Iran in retaliation for the April 13 attack triggered a massive flight to safe-haven assets, a headwind for the Mexican currency. However, hawkish comments by the Bank of Mexico (Banxico) Deputy Governor Jonathan Heath, boosted the Peso, which despite that, stills trading in the red. The USD/MXN trades at 17.16, up 0.50%.

According to Reuters, Israel attacked Iran in response to the April 13 drone attacks. There were reports of explosions in the Iranian city of Isfahan, which houses a military base. However, Iran is now downplaying the level of damage, and it appears there might not be a military response.

In an interview with Reuters, Banxico’s Deputy Governor Jonathan Heath said that rates would remain higher for longer, guiding the markets to expect a pause in the Mexican central bank’s next meeting in May. He expects 2 to 4 cuts, depending on data, of the six remaining monetary policy decisions of the institution.

Heath added that the USD/MXN exchange rate at 16.30 was “probably” too strong, suggesting that a “more sustainable rate” would be that the USD/MXN rates stay around 17.00. Regarding the US election, he said the “Peso could react negatively but not as much as it did in 2016.”

On Thursday, Bank of Mexico (Banxico) Deputy Governor Galia Borja said, “There was much left to be done” to bring inflation down and move toward Banxico’s 3.0% target.

Across the border, the economic docket in the United States (US) featured a speech by Chicago Federal Reserve President Austan Goolsbee, who shifted more neutral following his previous dovish stance.

Daily digest market movers: Mexican Peso treads water despite being boosted by Retail Sales

Mexico’s Retail Sales rose by 0.4% MoM in February compared to January, up 3.0% in the twelve months to the same period. This performance improved over the previous month when sales decreased by -0.6% MoM and -0.8% YoY.
A preliminary report by INEGI revealed that, based on preliminary estimates, Mexico’s economy likely grew 2.1% YoY in March.
On Wednesday, Bank of Mexico (Banxico) Deputy Governor Jonathan Heath commented that caution is important before normalizing monetary policy amid stubbornly sticky inflation. He added, “Maintaining a restrictive monetary policy is key for some time.”
The International Monetary Fund (IMF) revised its economic growth forecasts for Mexico, lowering the 2024 growth expectation from 2.7% to 2.4% and the 2025 forecast from 1.5% to 1.4%. The IMF attributed the reduction in the 2025 forecast to anticipated fiscal tightening by the new administration, which is expected to reverse the fiscal expansion that is driving growth this year. This reversal will involve scaling back current spending policies.
Chicago Fed President Goolsbee said that it makes sense to wait and get more clarity before easing policy, adding that the current restrictive monetary policy is appropriate.
On Thursday, Atlanta Fed President Raphael Bostic stated the central bank would likely not reduce rates in 2024. Echoing his comments was the New York Fed’s John Williams, commenting that current monetary policy is in a good place, indicating no rush to cut rates.
Data from the Chicago Board of Trade (CBOT) suggests that traders expect the Fed funds rate to finish 2024 at 4.995%, down from 5% a day ago.

Technical analysis: Mexican Peso plummets as USD/MXN buyers reclaim 200-day SMA

Following the overnight developments, the USD/MXN has shifted to a bullish bias, breaching the 200-day Simple Moving Average (SMA) at 17.16, a key support and resistance level. Traders use this level as a dynamic resistance/support level that depicts an asset’s overall trend.

However, USD/MXN buyers are not yet out of the woods. They must achieve a daily close above the January 23 high at 17.38, which would expose the 17.550 figure. Further upside is seen at 17.56, the December 5, 2023 swing high, ahead of the 18.00 mark.

On the other hand, if USD/MXN slides below the 200-day SMA, look for a retracement to the 100-day SMA at 17.08. If it is surpassed, sellers could drag the exchange rate toward the 17.00 figure.

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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