Market Data 
- The Mexican Peso pauses in its recovery in most major pairs.
- Risk appetite continues to be positive, however, supporting a bullish outlook for the Peso.
- Analysts at Rabobank expect the Peso to appreciate as long as volatility remains subdued.
The Mexican Peso (MXN) has stalled after rallying against most counterparts over recent sessions. The Peso had been supported by a rise in risk appetite from easing geopolitical tensions and strong US tech company earnings.
On Tuesday the general market mood remains positive, helped by the Caixin Chinese Manufacturing PMI – which hit a 14-month high – as well as French and Spanish GDP growth beating estimates in Q1.
USD/MXN is trading at 17.03, EUR/MXN at 18.22 and GBP/MXN at 21.34, at the time of publication during the European session.
Mexican Peso traders await GDP data
The Mexican Peso could be subject to volatility after the release of the preliminary reading for Q1 Mexican GDP growth data at 12:00 GMT.
In the previous quarter, the GDP growth rate was recorded as 2.5% YoY and 0.1% QoQ. If the data beats the previous results it could lead to an appreciation in the Mexican Peso.
Mexican Peso to continue strengthening – Rabobank
The Mexican Peso will continue to strengthen as long as market volatility remains low, according to analysts at Rabobank.
“..as long as volatility is declining, MXN will rally. While suppression of volatility is a tenuous assumption, it is our base case for the next couple of weeks,” says Rabobank.
Relatively high interest rates in Mexico – the Banxico overnight interest rate is 11.00% – support inflows from the carry trade in which traders borrow in a currency with low interest rates and use the loan to buy a currency with higher interest rates like the Mexican Peso.
“We expect interest rate differentials to remain favorable,” says Rabobank.
In the case of Mexican Peso’s most highly traded pair USD/MXN, the rate differential remains Peso-favorable.
“US-MX 2yr rate differentials have widened 33bp in April and will continue to act supportive for MXN over the course of May.”
The Banxico is likely to keep interest rates unchanged at its May meeting based on recent Banxico commentary.
“We have changed our Banxico forecast to reflect a pause at the May 9 meeting. This follows Deputy Governor Jonathan Heath’s interview on April 20, when he noted that he is ‘leaning towards a pause in May, and we can see how data evolves by June,’ which he highlighted is ‘likely’ to be a unanimous decision,” says Rabobank.
The high number of long positions amongst non-commercial speculators in the MXN futures market as well as a seasonal effect, which suggests May is a favorable month for MXN, are further drivers of upside, according to the bank.
Rabobank forecasts USD/MXN to fall below 17.00, eventually reaching a target of 16.80.
Technical Analysis: USD/MXN sideways trend continues
USD/MXN further extends its sideways trend over the short-term, oscillating within a range that has a floor at 16.86 and a ceiling at 17.40.
USD/MXN 4-hour Chart
The pair is in a down leg within the sideways trend and could continue falling to the range lows. The Moving Average Convergence/ Divergence (MACD) is printing a red histogram and looks poised to move below the zero line, further adding a bearish tenor to the chart.
A decisive breakout of the range – either below the floor at 16.86, or the ceiling at 17.40 – would change the directional bias of the pair.
A break below the floor could see further downside to a target at 16.50, followed by the April 9 low at 16.26.
On the other side, a break above the top would activate an upside target first at 17.67, piercing a long-term trendline and then possibly reaching a further target at around 18.15.
A decisive break would be one characterized by a longer-than-average green or red daily candlestick that pierces above or below the range high or low, and that closes near its high or low for the period; or three green/red candlesticks in a row that pierce above/below the respective levels.
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.
