Market Data 
- USD/MXN depreciates as the US Dollar faces challenges ahead of CPI data release.
- The upcoming US inflation report may provide insights into the scale of the Fed rate cut in September.
- Financial institutions expressed concerns that proposed judicial reforms could undermine judicial independence and deter foreign investment.
USD/MXN retraces its recent gains from the previous session, trading around 20.00 during Wednesday’s European hours. This downside of the pair is attributed to the subdued US Dollar (USD) amid decreasing Treasury yields.
Traders await the US Consumer Price Index (CPI) data scheduled to be released later in the North American hours. This upcoming US inflation report may offer fresh cues regarding the potential magnitude of the Federal Reserve’s (Fed) interest rate cut in September. Moreover, the recent US labor market report has cast doubt on the possibility of an aggressive Fed interest rate cut.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 31.0%, down from 38.0% a week ago.
The Mexican Peso (MXN) is under downward pressure due to concerns over judicial reforms and dovish expectations for the Bank of Mexico (Banxico). Investor sentiment has been weakened by a judicial reform bill passed by Mexico’s lower house on September 4, which proposes electing judges rather than appointing them.
Financial institutions like Morgan Stanley and Julius Baer have raised concerns that this reform could be a threat to judicial independence and foreign investment. Both have issued warnings about the potential for credit downgrades, reflecting heightened risks to Mexico’s economic stability.
On Monday, the latest Consumer Price Index (CPI) data showed that Mexican inflation was weaker than anticipated, boosting the likelihood that the Bank of Mexico (Banxico) will cut interest rates at its September meeting.
Kimberley Sperrfechter, an analyst at Capital Economics, noted that the latest inflation data and the possibility of a Federal Reserve rate cut next week “indicate that Banxico is on track to lower its policy rate by another 25 basis points in September.”
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.
