USD/MXN rallies near the 18.00 psychological barrier amid Mexico's asset nationalization

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Mexican Peso tanks over 1% against USD ahead of inflation report – Crypto News

Published

1 year ago

July 24, 2024

Dripp

Mexican Peso drops sharply, trading at 18.09, with market focus on upcoming inflation and GDP data.
Mexico’s economy decelerates, with retail sales missing expectations, fueling a bleak outlook.
Banxico expected to cut rates by 25 basis points in August, with economists revising year-end USD/MXN forecast to 18.80.

The Mexican Peso dropped sharply during Tuesday’s North American session, losing more than 1.00% against the Greenback, which registers mild gains amid falling US Treasury bond yields. Market participants expect the release of Mexico’s mid-month inflation figures on Wednesday. This, along with the release of US Gross Domestic Product (GDP) and inflation data, could dictate the path of the Mexican currency. The USD/MXN trades at 18.12 after bouncing off daily lows at 17.90.

Mexico’s economy continued to decelerate in May, according to the Economic Activity Indicator, released by the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI). Retail Sales for the same period missed the mark, creating a gloomy economic outlook.

Meanwhile, the Citi Research Expectations survey showed that all the economists polled expect a 25-basis point rate cut by the Bank of Mexico (Banxico) at the upcoming August meeting.

The consensus revised the USD/MXN exchange rate upward toward the end of the year, from 18.70 to 18.80. For 2025, they estimate the spot price to reach 19.40, unchanged from the last survey.

On the US front, market participants continued to diggest over-the-weekend developments, which saw US President Joe Biden step aside from the Presidential race and endorse Vice President Kamala Harris.

Aside from this, expectations that the US Federal Reserve’s (Fed) preferred gauge for inflation, the Core Personal Consumption Expenditure (PCE) Price Index, will continue to edge lower and increase the odds of a potential September rate cut by the Fed.

Besides that, the US economic docket will feature the release of US GDP data.

Daily digest market movers: Mexican Peso plummets amid strong US Dollar

Citi Research Expectations survey shows that analysts estimate inflation to end at 4.30% YoY, up from 4.20%, while underlying inflation is foreseen to finish 2024 at 4.0%.
Regarding growth, Mexico’s economy is expected to grow 1.9%, down from 2.0% in the last poll.
Fitch Ratings reaffirmed Mexico’s BBB- rating with a stable outlook but noted that the proposed judicial reform could impact the country. The credit rating agency expressed uncertainty about the upcoming administration’s ability to narrow the fiscal deficit, anticipated a slight economic downturn in 2025, and mentioned that trade tensions with the US could leave Mexico vulnerable.
The US Dollar Index (DXY), which tracks the buck’s value against the other six currencies, edges up 0.14%, up at104.42.
US Existing Home Sales were lower than expected yet failed to trigger a USD/MXN exchange rate reaction.
The Richmond Fed Manufacturing Index plunged to -17 from -10, underscoring manufacturing weakness around the region.
The CME FedWatch Tools show that the chances of a quarter-percentage-rate cut to the federal funds rate in September are at 96%.
June consumer inflation figures were lower than expected in the United States, increasing the chances that the Federal Reserve would lower borrowing costs in 2024 by at least 50 basis points, according to the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso tumbles as USD/MXN climbs above 18.00

The USD/MXN has reclaimed the 18.00 figure, and it seems to continue to edge higher after posting a ‘shooting star’ bear candle. Seller’s failure to cap spot prices beneath 18.00 could pave the way for a re-test of the June 28 peak at 18.59, but there would be some resistance areas between current levels and the latter.

The USD/MXN first resistance would be 18.50, followed by the aforementioned. In the outcome of a decisive break, the next resistance would be the year-to-date (YTD) high at 18.99.

Conversely, if USD/MXN retreated beneath 18.00, that would pave the way to challenge the 50-day Simple Moving Average (SMA) at 17.74, the first support level. The next support would be the latest cycle low of 17.58; the July 12 high turned support. A breach of the latter will expose the January 23 peak at 17.38.

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.