- The Mexican Peso continues its uptrend despite poor Mexican data and risk aversion.
- The wide interest-rate differential between Mexico and Western countries continues to favor the Peso in the carry trade.
- USD/MXN hits the conservative target for its range breakout.
The Mexican Peso (MXN) seesaws between marginal gains and losses in its key pairs on Tuesday after shrugging off poor Retail Sales data from Mexico and hawkish commentary from Federal Reserve (Fed) speakers on Monday, and continuing to drift higher.
The wide interest-rate differential between Mexico and most major economies – with relatively higher interest rates in Mexico (11.00%) providing an attractive draw for carry traders – is a key factor driving MXN’s uptrend, with little prospect of the gap closing anytime soon.
USD/MXN is trading at 16.55, EUR/MXN at 17.98 and GBP/MXN at 21.05, at the time of writing.
Mexican Peso shrugs off poor data
The Mexican Peso trades relatively flat on Tuesday despite recent data showing a fall in Mexican Retail Sales on both a monthly and yearly basis.
Whilst the data indicated the high interest rates imposed by the Bank of Mexico (Banxico) are probably having the desired effect of cooling the economy, Banxico has not signaled it is in a hurry to reduce interest rates yet.
Indeed on Friday, the Deputy Governor of Banxico, Irene Espinosa, said she thought interest rates should remain at their current level until inflation had been brought down on a sustainable basis.
Somber market mood caps Peso’s upside
The generally somber market mood on Tuesday is capping the Peso’s upside, however, as investors retreat from risk assets and commodities – MXN included – out of a fear high interest rates are here to stay. Asian stocks are down and Oil, metals and softs are following suit.
The change in sentiment comes as a result of commentary from central bankers, in both the US and Australia, that suggests they are not only reluctant to cut interest rates in the near future but are even discussing raising them.
In the US, Federal Reserve Bank of Cleveland President Loretta Mester said inflation risks were “tilted to the upside”, that the Fed could “even raise them (rates)” if inflation rose, and that it was “no longer appropriate” to expect the Fed to make three cuts this year.
The minutes of the RBA May meeting, released on Tuesday morning, showed that the board of governors discussed the possibility of raising interest rates. It was the first time in many months they had discussed further policy tightening.
Technical Analysis: USD/MXN hits first downside target
USD/MXN – or the number of Pesos that can be bought with one US Dollar – edges lower on Tuesday, continuing its overall bearish bias of recent weeks.
USD/MXN 4-hour Chart
USD/MXN is falling in a short-term downtrend within a descending channel that favors short bets over longs.
The pair has now just reached its conservative price objective for the breakout of the mid-April to May range at 16.54. This is calculated as the 0.618 Fibonacci ratio of the range’s height extrapolated lower.
Further bearishness could still see USD/MXN reach 16.34, the more bearish target, calculated by taking the full height of the range and extrapolating it lower.
The Relative Strength Index (RSI) momentum indicator is still oversold, which indicates traders should not add to their short positions. If the RSI exits oversold conditions and returns to neutral territory above 30, it would be a signal to close existing short positions as a correction is probably underway. Once the correction ends, however, the descending channel is expected to continue taking prices lower in line with the dominant downtrend.
Given the medium and long-term trends are also bearish, the odds further favor more downside.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
