- The Mexican Peso is strengthening as risk appetite improves.
- Recent mixed US data is dispelling fears of a hard landing for the US economy.
- Political risk remains a negative background factor for the Peso.
The Mexican Peso (MXN) trades higher in its key pairs on Wednesday amid a cautiously optimistic market mood. European equities are trading modestly higher and the increasingly held view that the US Federal Reserve (Fed) will be able to lower interest rates in an orderly fashion – avoiding disruptions to the economy – is further buoying investor risk appetite.
Several lower tier US data releases have come out over recent days that have painted a mixed picture and helped allay concerns the economy is heading for a hard landing. These include higher-than-expected Consumer Confidence in August and a surge in US Durable Goods Orders in July released Monday, though labor-market pessimism lingers and the Richmond Fed Manufacturing Index sank below estimates.
Mexican Peso faces pressure from political factors
The Mexican Peso, meanwhile, has been pressured in recent sessions by a revival of the debate over reforms the new Morean-led government is planning for the Mexican judiciary. The proposed changes would make judges and magistrates elected by popular vote; critics say this will undermine justice, democracy and investor confidence in Mexico. ¡
Monday saw the new reforms voted through a committee for debate in the lower house in September when parliament opens, according to ABC News. Disagreement over the reforms has led to public demonstrations in Mexico City by members of the judiciary. The US ambassador to Mexico, Ken Salazar, said the “popular direct election of judges is a major risk to the functioning of Mexico’s democracy.”
Salazar’s criticisms have led the Mexican government to “pause” diplomatic relations with both the US and Canada. If the stand-off escalates there is the potential for it to negatively impact free trade between the three countries with negative implications for the Mexican Peso. This would especially be the case should former-President Donald Trump win the presidential election.
The breakdown in diplomatic relations comes at a time where Mexico stands to potentially benefit from an escalating trade war between North America and China. News on Tuesday revealed, Canada has decided to increase tariffs on Chinese electric vehicle (EV) and steel imports, by 100% and 25%, respectively.
The decision could benefit Mexico, however, because of its existing role as an intermediary manufacturer of Chinese EVs. These, destined for North America, are not subject to punitive tariffs because of the free-trade agreement that exists between the US, Canada and Mexico, according to Bloomberg News.
At the time of writing, one US Dollar (USD) buys 19.64 Mexican Pesos, EUR/MXN trades at 21.89, and GBP/MXN at 26.00.
Technical Analysis: USD/MXN extends leg higher within rising channel
USD/MXN is moving up within a rising channel and the established uptrend favors longs over shorts.
The pair has broken above a key high that was capping upside at 19.52 (August 23 high), giving further impetus to the uptrend. A break above 19.80 would confirm more gains towards the upper channel line in the 20.60s.
USD/MXN 4-hour Chart
The Relative Strength Index (RSI) has just exited overbought and fallen back into neutral territory. This is a sell signal and indicates a pull back within the uptrend could be unfolding. Such a correction will probably find support at the 19.52 level (previous resistance turned support) and from there possibly resume its upside bias.
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.
