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- The Mexican peso strengthened for the second day in a row with USD/MXN falling nearly 1%.
- The positive market reaction comes in response to the selection of Marcelo Ebrard as Minister of Economy.
- Banxico expected to keep interest rates unchanged amid inflation fears and the recent devaluation of the peso.
The Mexican peso rose for the second straight day against the US dollar on Friday after President-elect Claudia Sheinbaum unveiled the first members of her cabinet on Thursday, which was welcomed by investors. Meanwhile, traders are preparing for the Bank of Mexico’s (Banxico) monetary policy decision next week, which is expected to continue. Rates without change. USD/MXN is trading at 18.21, down 0.80%.
On Thursday, Mexican President-elect Sheinbaum revealed the first six ministers who will take office on October 1. It appointed Marcelo Ebrard as Minister of Economy and Juan Ramon de la Fuente as Minister of Foreign Affairs. Traders saw these appointments as positive as Ebrard will oversee the review of the USMCA free trade agreement.
On the data side, the Mexican economic calendar highlighted economic activity, which declined in April, as shown in the monthly figures. In the 12 months to April, it beat estimates.
Meanwhile, most analysts estimate that Banxico will keep interest rates unchanged following the 6.95% depreciation of the Mexican peso following the general election on June 2. Consensus had expected a 25 basis point cut on June 27, but it was not unanimous, with Deputy Governors Jonathan Heath and Irene Espinosa expressing that inflation risks were skewed to the upside.
On the other side of the border, the Standard & Poor’s global PMIs for June beat estimates, a sign of economic strength. However, the latest existing home sales data indicate that the housing market continues to slow.
Daily summary of market drivers: Mexican peso advances after mixed economic activity data
- Economic activity in Mexico for April fell by -0.6% m/m, deeper than the expected contraction of -0.3%. On an annual basis, economic activity expanded by 5.4%, up from -1.3%, and exceeding expectations of 3.8%.
- A Citibanamex survey showed that most analysts expect Banxico’s next rate cut to come at the August 8 meeting and that interest rates will be cut from 11.00% to 10.25%, up from 10%.
- According to the survey, economists estimate that inflation will end 2024 lower at 4.27%, core inflation at 4.02%, and the USD/MXN exchange rate at 18.70.
- The USD/MXN pair is stabilizing after last week’s verbal intervention by Banxico Governor Victoria Rodriguez Ceja, who said that the central bank is attentive to fluctuations in the Mexican currency’s exchange rate and can work to restore “order” in the markets.
- Flash PMIs for the global manufacturing and services sector expanded in June above estimates. The manufacturing PMI came in at 51.7, up from 51.3 and estimates of 51. The services PMI jumped from 54.8 to 55.1 and was above expectations of 53.7.
- US existing home sales in May were lower than expected at 4.11 million from 4.14 million in April, a contraction of -0.7%.
- The CME FedWatch tool shows the odds of a 25 basis point Fed rate cut at 59.5%, up from 57.5% on Thursday.
Technical Analysis: Mexican Peso rises as USD/MXN falls below 18.30
USD/MXN has a bullish bias with the golden cross appearing a couple of days ago, but today’s drop below 18.30 has opened the door for a pullback with bears eyeing the 18.00 psychological level. At the time of writing, momentum is in favor of the sellers as the Relative Strength Index (RSI) has fallen almost vertically towards the neutral 50 line.
However, the first support for USD/MXN will be at 18.00. Once above it, the next stop will be at the 50-day SMA at 17.29, ahead of the 200-day SMA at 17.23.
For the uptrend to continue, the USD/MXN must break above 18.50 if buyers want to retest the YTD high of 18.99. A break of the latter would expose the March 20, 2023 high of 19.23. If this price is cleared, it will lead to a slight rise to 19.50.
Frequently asked questions about the Mexican Peso
The Mexican Peso (MXN) is the most widely traded currency among its counterparts in Latin America. Its value is widely determined by the performance of the Mexican economy, the policy of the country’s central bank, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans living abroad, especially in the United States. Geopolitical trends can also move the Mexican peso: for example, offshoring – or the decision by some companies to move manufacturing capacity and supply chains closer to their home countries – is seen as a catalyst for the Mexican currency as the country is a major manufacturing hub in the Americas. . Another catalyst for the Mexican peso is oil prices as Mexico is a major exporter of this commodity.
The main goal of the Mexican Central Bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its 3% target, the midpoint of the 2% to 4% tolerance range). To this end, the Bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the economy as a whole. Higher interest rates are generally a positive for the Mexican Peso (MXN) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the Mexican peso.
Macroeconomic data releases are key to assessing the state of the economy and can have an impact on the valuation of the Mexican Peso (MXN). A strong Mexican economy, based on high economic growth, low unemployment, and high confidence, is good for the Mexican peso. Not only does it attract more foreign investment, it may encourage the Bank of Mexico (Banxico) to increase interest rates, especially if this force is accompanied by higher inflation. However, if economic data is weak, the value of the Mexican peso is likely to decline.
As an emerging market currency, the Mexican peso tends to do its best work during periods of risk, or when investors view broader market risk as low and are therefore keen to take on higher-risk investments. Conversely, the Mexican peso tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell high-risk assets and flee to more stable safe havens.
