Market Data 
- The Mexican Peso trades lower in its key pairs ahead of the release of Banxico’s June meeting Minutes.
- Uncertainty over the trajectory of future monetary policy in Mexico is making traders hesitant to place bets.
- The Peso weakens the most against the Pound after the release of better-than-expected UK GDP data.
The Mexican Peso (MXN) trades mixed in its key pairs on Thursday – rising versus the US Dollar (USD) but falling against the Pound Sterling (GBP) and the Euro (EUR). MXN’s weakness versus the Pound can be attributed to the release of better-than-expected UK Gross Domestic Product (GDP) data for May, which came out at 0.4% month-over-month, roundly beating economist’s estimates of 0.2%.
Traders are also hesitating ahead of the release of the Minutes of the Bank of Mexico’s (Banxico) last policy meeting. Uncertainty regarding the trajectory of interest rates has increased after the release of higher-than-expected headline Mexican inflation data for June. The impact of the Peso’s devaluation following the June election and the imported disinflation thus anticipated, are further factors complicating the outlook.
At the time of writing, one US Dollar (USD) buys 17.86 Mexican Pesos, EUR/MXN trades at 19.37, and GBP/MXN at 23.00.
Mexican Peso lower ahead of Banxico Minutes
The Mexican Peso is edging down on Thursday after rallying for roughly the last nine days – especially against the US Dollar. Traders are wary of placing bullish bets ahead of the release of the Minutes of Banxico’s June meeting, scheduled for 15:00 GMT.
The Minutes ought to provide more information on the Banxico’s stance in terms of the economy and the direction of future policy. These, in turn, could influence the Peso.
“We expect the minutes to elaborate on both disinflation forces and some of the upside risks embedded in the ongoing MXN re-adjustment, and the forces behind growth disappointments,” say analysts at JP Morgan.
Banxico’s board is expected to acknowledge the “underwhelming growth dynamics and downgrade its growth outlook — now openly underscoring downside risks to economic activity,” they added.
If accurate, JP Morgan’s preview suggests the Peso is at risk of weakening following the release, since a downgrade in the growth outlook will put more pressure on Banxico to cut interest rates despite the above-consensus rise in the June headline inflation data. Lower interest rates are negative for a currency as they reduce foreign capital inflows.
Mixed reaction to inflation data causes uncertainty
The 12-month inflation rate in June came out at 4.98%, which was higher than the 4.84% expected by economists and the 4.69% previously, according to data from INEGI.
Banxico Deputy Governor Jonathan Heath wrote on X that June’s inflation data was “very worrying.” Heath is seen as a monetary “hawk” of the Banxico board – in favor of higher interest rates – similar to Deputy Governor Irene Espinosa.
“Headline inflation reached 4.98% in June, the highest inflation rate in the last 12 months. On the margin, the annual rate for the second half of June registered 5.17%. Very worrisome,” wrote Heath.
This comes after Heath’s comments comparing his stance to that of the Chairman of the Federal Reserve, Jerome Powell, in terms of its data dependency. The effect of his words was to lower rate-cut bets and further fuel the rally in the Peso.
Deputy Governor of the Bank of Mexico Galia Borja urged caution in recent remarks.
“It’s prudent not to make hasty decisions” regarding monetary policy, Borja said, adding that officials must be patient and current policy was “undoubtedly restrictive.”
Slowdown in core inflation could be key – Capital Economics
Whilst headline inflation in Mexico rose in June, core inflation, which excludes volatile food and energy components, came out below expectations at 0.22%, when economists had estimated 0.24%. Nevertheless, the June reading was above the 0.17% in May.
The slower increase in core inflation, however, makes economists at Capital Economics less concerned about the rise in headline inflation.
“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 Banxico does go ahead and cut interest rates in August, this could have a negative impact on the Peso.
Technical Analysis: USD/MXN possible in ABC correction
USD/MXN is possibly falling in the wave C of an ABC correction that started after the June 12 high. The short-term trend is bearish, and given “the trend is your friend” the odds favor more downside.
USD/MXN Daily Chart
USD/MXN has broken support at the 17.87 (June 24 low), however, the break was not decisive, indicating the possibility it may be false and the pair could recover.
USD/MXN has also fallen to the conservative target for wave C, which is measured by taking the 0.618 Fibonacci ratio of wave A as a guide since C is often equal to A or a Fibonacci ratio of it. Given that the pair has reached this lesser target, there is a further risk of a recovery evolving.
If USD/MXN breaks below Wednesday’s low at 17.76, however, it would reinvigorate bears and probably lead to a move down to the target at the end of wave C, at roughly the level of the 50-day Simple Moving Average (SMA) situated at 17.60.
Meanwhile, the direction of the medium and long-term trends 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.
