- Mexican Peso erased its earlier losses yet remains fragile after hitting 14-month low of 18.65 earlier.
- Political turmoil in Europe and Mexico’s domestic reforms contribute to emerging market currency volatility.
- USD/MXN traders focus on upcoming US CPI data and FOMC decision, expected to trigger volatility in the pair.
The Mexican Peso stabilized against the US Dollar on Monday, following remarks from outgoing President Andres Manuel Lopez Obrador. Nevertheless, Morena’s Party leader Mario Delgado insisted on AMLO’s reforms submitted in February of 2024, a headwind for the emerging market currency. Therefore, the USD/MXN trades at around 18.26, printing modest losses of 0.73%.
Risk appetite seems to have deteriorated amid political turmoil in Europe, triggering a flight to safety and hurting emerging market currencies. The Greenback remains firm against a basket of six currencies while traders await the Federal Open Market Committee (FOMC) interest rate decision on Wednesday.
Back to Mexico’s domestic issues, Mexican President AMLO stated that he will not ask the incoming president to hurry the passage of constitutional reforms. That has calmed the financial markets following last week’s remarks of President AMLO and Morena’s Mexican Congress leader Ignacio Mier, with both stating they would pass the judicial reform and the disappearance of autonomous bodies.
Earlier, the Mexican Peso hit a 14-month low as the USD/MXN reached 18.65 before reversing its course.
Last Thursday, Mexico’s President-elect Claudia Sheinbaum said that “no decision had been made on a package of constitutional reforms put forward by [the] outgoing president,” via Reuters.
USD/MXN traders should know that the pair will be extremely sensitive and volatile amid political uncertainty in Mexico.
Aside from politics, Mexico’s economic docket will feature Industrial Production for April. Across the border, on Wednesday, US Consumer Price Index (CPI) data from May is expected to remain stickier, ahead of the Federal Reserve’s (Fed) monetary policy decision.The latest US data suggests that the Fed will keep rates unchanged and adhere to its “higher for longer” mantra.
Daily digest market movers: Mexican Peso halts its freefall as AMLO’s backpedals
- AMLO’s proposals submitted to Mexican Congress in February 2024 include a reform of the Supreme Court, which proposes that the Supreme Court’s ministers be elected by popular vote; electoral reform, which seeks to have INE councilors elected by popular vote and reduce multi-membership; and reform of autonomous bodies, which entails the dissolution of the transparency body.
- Mexican Peso depreciation could weigh on the Bank of Mexico’s (Banxico) decision to ease policy, even though last month’s core inflation slowed. Therefore, keeping interest rates higher could prompt deceleration in the economy and increase the odds of a 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.
- Last week’s US data decreased the odds for a Fed rate cut in September, according to the CME FedWatch Tool, from above 50% to 46.7%.
- December’s 2024 fed funds futures contract hints that investors expect 28 basis points of rate cuts by the Fed throughout the year.
Technical analysis: Mexican Peso appreciates, but the bias shifted bearish
The USD/MXN remains bullishly biased even though the rally stalled after hitting a multi-month high of 18.65, which sponsored a leg down toward the current exchange rate. Last Friday, I wrote, “a fifth daily close above a four-year-old downslope resistance trendline drawn from all-time highs (ATH) at around $25.77, which was broken on Monday. That could be the last nail in the coffin for the Mexican Peso’s strength.”
That was achieved, and the pair pushed toward 18.65, yet buyers are taking a respite before extending their gains. That said, the USD/MXN’s next resistance would be the October 6 high of 18.48, followed by today’s high of 18.65. Once cleared, the next stop would be the psychological 19.00 figure. Overhead resistance levels lie ahead, like the March 20, 2023, high of 19.23, followed by the psychological 20.00 mark.
On the other hand, sellers need to push the USD/MXN back below the April 19 high of 18.15 if they would like to keep the pair within the 18.00-18.15 trading range.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
