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USD/MXN rebounds after hitting weekly lows near 18.70; Mexican Peso outperforms EM peers USD/MXN rebounds after hitting weekly lows near 18.70; Mexican Peso outperforms EM peers

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Mexican Peso edges lower as risk sentiment weighs – Crypto News

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  • The Mexican Peso trades lower in its major pairs at the start of the new trading week.
  • Global growth fears and the unwillingness of the Fed to lower borrowing costs are curbing enthusiasm and weighing on MXN. 
  • USD/MXN is still pulling back in the midst of a short and medium-term uptrend. 

The Mexican Peso (MXN) edges lower in its key pairs on Monday as market sentiment sours amid global growth fears and French political uncertainty. As a “risk-on” currency, the Peso accordingly takes some heat. 

At the time of writing, a single US Dollar (USD) buys 18.49 Mexican Pesos, EUR/MXN is trading at 19.81 and GBP/MXN at 23.44.

Mexican Peso edges lower on global outlook, Fed caution

The Mexican Peso trades marginally bearish at the start of the new trading week as global growth concerns and the political situation in France weigh. A contraction in official Chinese manufacturing data in May combined with a fall in commodity imports due to rising prices are partly to blame. However, the US Federal Reserve’s (Fed) cautious stance at its meeting on Wednesday, with the bank clearly not in a hurry to reduce borrowing costs, further weighed on overall market sentiment. 

On Thursday the Peso recovered after verbal intervention by the President of the Banco de Mexico (Banxico), Victoria Rodriguez Ceja, who said Banxico would step in to prop up the Peso if volatility became too “extreme”.

Political risk also continues to provide a background risk for the Peso. Investors are fretting over the victory of President-elect Claudia Sheinbaum and her left-wing coalition Sigamos Haciendo Historia (SHH) at the June 2 elections. SHH won a supermajority in the Mexican House of Deputies and came two seats away in the Senate. This will give it a mandate to push through radical amendments to the constitution that have set markets on edge. 

Market positioning has added fuel to sell-off following the build-up of an overweight long bet on the Mexican Peso since its long-term uptrend began in 2020. Relatively high interest rates of 11.00%, set by the Banxico to control inflation, have been a major draw for investors seeking returns. This is especially true of carry traders, for example, who borrow in currencies with low interest rates like the Japanese Yen (Apr circa 0.0% -0.1%) and invest in currencies like the Mexican Peso that offer higher returns (Apr circa 11.00%), pocketing the difference. 

“Before the election, we’d been arguing for some time that the Peso appeared increasingly overvalued and was vulnerable to a sharp fall – the declines over the past couple of weeks have taken it within touching distance of our long-standing year-end forecast of 19.00 (USD/MXN),” said Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, to FXStreet. 

Technical Analysis: USD/MXN pulls back but remains in short-term uptrend

USD/MXN appears to be resuming its short-term uptrend after a pullback, and given “the trend is your friend,” the odds favor a continuation higher, probably to the next target situated at 19.22 (March 2023 high).

USD/MXN Daily Chart 

A break above Friday’s high at 18.68 would provide additional confirmation of more upside towards the target at 19.22.

The Relative Strength Index (RSI) has just exited the overbought zone, which is a signal for traders to close their longs. This suggests a risk the correction could still go deeper. That said, the established uptrend is likely to resume eventually.

The direction of the long-term trend is in doubt after the break above the October 2023 high. Previous to that, it was down. 

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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