Market Data 
- Mexican Peso down 0.29% amid risk aversion on weak China data and European political uncertainty.
- Banxico’s verbal intervention last week stabilized the Peso, central bank remains vigilant on currency volatility.
- Upcoming economic data from Mexico expected to show economic slowdown.
The Mexican Peso traded with minuscule losses against the US Dollar on Monday and is down 0.29% as risk appetite deteriorates based on weak China data and political uncertainty in Europe. The emerging market currency would remain volatile as traders digest the incumbent judiciary reform in September, presented by current President Andres Manuel Lopez Obrador and approved by upcoming President Claudia Sheinbaum. The USD/MXN trades at 18.51, gaining 0.34%
The Mexican currency stabilized last week after verbal intervention by Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja last Wednesday, who said the central bank is attentive to volatility in the Mexican currency exchange rate and could act to restore “order” in markets.
Last week, Claudia Sheinbaum tried to calm investors and told them not to be concerned about the reforms. She said, “Mexico’s economy is healthy and strong, and [there is] nothing to worry about.”
The economic docket in Mexico will feature the announcement of Aggregate Demand, Private Spending, Retail Sales, and Economic Activity data. The data is expected to show that the economy is slowing down due to higher interest rates set by Banxico at 11%, which are expected to be lowered in the June 27 meeting.
Despite that, the USD/MXN exchange rate continues to be driven by political uncertainty about the changes to the Mexican Constitution that threaten the state of law.
Across the border, the latest Federal Reserve (Fed) decision to keep rates unchanged and the projection of just one interest rate cut in 2024 cushioned the Greenback and boosted the USD/MXN to 14-month highs.
The US economic docket is absent except for Fed officials crossing the newswires. Up next, the Philadelphia Fed’s Patrick Harker will give a speech later on Monday.
Daily digest market movers: Mexican Peso on defensive amid risk-aversion
- In February 2024, AMLO presented several proposals to the Mexican Congress. These include a Supreme Court reform to elect Supreme Court ministers through a popular vote, an electoral reform aimed at electing electoral commission councilors by popular vote and reducing multi-member representation, and a reform of autonomous bodies that proposes dissolving the transparency body.
- Mexican Peso depreciation could weigh on Banxico’s decision to ease policy on June 27 despite last month’s dip in core prices. Therefore, keeping interest rates higher could prompt deceleration in the economy and increase the odds of a possible recession.
- Morgan Stanley noted that if Mexico’s upcoming government and Congress adopted an unorthodox agenda, it would undermine Mexican institutions and be bearish for the Mexican Peso, which could weaken to 19.20.
- Latest US inflation report increased the odds of a Fed rate cut in September from 62% to 56.3%, according to CME FedWatch Tool.
- December’s 2024 fed funds futures contract hints that investors expect 35 basis points of rate cuts by the Fed through the end of the year.
Technical analysis: Mexican Peso registers losses as USD/MXN climbs above 18.50
The USD/MXN uptrend remains intact, even though it has hovered near 18.50 for the last three trading days. Momentum supports buyers as the Relative Strength Index (RSI) remains bullish after exiting overbought territory. That said, if buyers achieve a daily close above 18.50, that could pave the way for further upside.
Once buyers reclaim 18.50, the next resistance level would be the year-to-date high of 18.99, followed by the March 20, 2023, high of 19.23. A breach of the latter will sponsor an uptick to 19.50, ahead of the psychological 20.00 mark.
Conversely, if sellers push prices below the April 19 high of 18.15, that would keep the exotic pair trading within the 18.00-18.15 range.
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.
