Market Data 
- The Mexican Peso is rising after the release of broadly inflationary data suggests interest rates might remain elevated.
- Relatively high interest rates in Mexico, at 11.00%, are drawing foreign capital inflows, supporting MXN.
- USD/MXN has broken below the key June 24 low at 17.87.
The Mexican Peso (MXN) continues appreciating in its key pairs on Wednesday after the release of Mexican macroeconomic data on Tuesday showed continued signs of inflationary pressures in the economy.
An overall beneficial backdrop due to carry flows is further supporting the Peso because of the attractiveness to foreign investors of the relatively high interest rates on offer in Mexico (11.00%).
The carry trade is an operation in which investors borrow in a currency where interest rates are low (like the Yen) and bank the money in a currency where interest rates are high (like MXN). The difference between the interest payments on the loan and the interest paid on the deposit (or bond) renders the profit, all other things being equal.
At the time of writing, one US Dollar (USD) buys 17.81 Mexican Pesos, EUR/MXN trades at 19.27, and GBP/MXN at 22.81.
Mexican Peso recovers on inflationary data
The Mexican Peso is recovering as investors mull recent macroeconomic data that showed Mexican inflation broadly rising in June.
The Headline Inflation rate in Mexico came out at 0.38% on a month-on-month basis, beating the 0.24% expected by economists and higher than the negative 0.19% of May, according to data from INEGI.
Core Inflation for June, which excludes volatile food and energy components, came out at 0.22%, falling below the 0.24% estimated by economists but above the 0.17% in May.
The 12-month Inflation rate in June, meanwhile, came out at 4.98%, which was higher than the 4.84% expected by economists and the 4.69% previously.
The slower increase in core inflation could be critical in terms of the outlook for interest rates in Mexico, according to investor advisor service of Capital Economics.
“Core inflation edged down last month. While there’s still a lot of uncertainty around the next rate decision in August, we think that the easing of core price pressures, alongside the weak run of activity data and the rebound in the Peso leave an August rate cut in play,” says Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics.
Assuming the Banxico does go ahead and cut interest rates in August, this could have a negative impact on the Peso.
Technical Analysis: USD/MXN breaches key June 24 low
USD/MXN breaks below the key June 24 line-in-the-sand low at 17.87.
USD/MXN Daily Chart
The break is so far on an intraday basis. A decisive break below 17.87, would reconfirm the down-trending bias, with the next target lying at 17.50 (50-day Simple Moving Average).
A decisive break would be one accompanied by a long red candle that closed near its low or three red candles in a row that broke below the level.
As things stand, the short-term trend is bearish, and the “the trend is your friend” adage suggests the odds favor an extension lower.
The direction of the medium and long-term trends, meanwhile, remain 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.
