- USD/MXN trades near its highest level of 20.23 since September 2022
- A broad selloff in financial markets has negatively impacted emerging market currencies like the Mexican Peso.
- San Francisco President Mary Daly noted that there is openness to the possibility of cutting rates in upcoming meetings.
USD/MXN trades around 19.30 during the early European session on Tuesday, following a retreat from its highest level of 20.23 since September 2022, reached on Monday. The USD/MXN pair faced challenges due to increased risk aversion. Recent downbeat labor market data from the United States (US) has raised concerns that the Federal Reserve may be falling behind in addressing an economic downturn.
Growth worries in the United States have triggered a broad selloff in financial markets, which has negatively impacted emerging market currencies such as the Mexican Peso. However, the upside of the USD/MXN pair could be limited as the US Dollar (USD) could struggle due to the expectation of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool shows a 74.5% probability of this rate cut at the September meeting, up sharply from the 11.4% chance reported just a week ago.
According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly expressed increased confidence on Monday that US inflation is moving towards the Fed’s 2% target. Daly noted that “risks to the Fed’s mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.”
The Mexican Peso (MXN) faces challenges as concerns about a slowing economy raise speculation about a potential dovish shift from the Bank of Mexico (Banxico). Mexico’s Gross Domestic Product (GDP) grew by only 0.2% in the second quarter ending in June, down from the 0.3% growth recorded in the previous quarter. Traders are expected to focus on the July Auto Exports data due on Tuesday, with further attention turning to inflation data and Banxico’s monetary policy decision on Thursday.
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.
