Market Data 
- USD/MXN gains ground due to increased risk aversion despite the dovish Fed.
- The US Dollar may limit its upside due to rising speculation of the Fed deducting rates in September.
- IMF has revised Mexico’s GDP growth expectations for 2024 from 2.4% to 2.2%.
USD/MXN extends gains for the second successive session, trading around 17.70 during early European hours on Thursday. The US Dollar (USD) rebounds amid increased risk aversion, driven by improved US Treasury yields, underpinning the USD/MXN pair.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against the six other major currencies, trades around 103.80, with yields on 2-year and 10-year US Treasury bonds standing at 4.45% and 4.17%, respectively, at the time of writing.
However, the US Dollar may limit its upside due to the high likelihood of a rate-cut decision by the Federal Reserve (Fed) in its September policy meeting. According to CME Group’s FedWatch Tool, markets now indicate a 93.5% probability of a 25-basis point rate cut at the September Fed meeting, up from 69.7% a week earlier.
On Wednesday, Fed Governor Christopher Waller said that the US central bank is ‘getting closer’ to an interest rate cut. Meanwhile, Richmond Fed President Thomas Barkin stated that easing in inflation had begun to broaden and he would like to see it continue,” per Reuters.
On the MXN front, the International Monetary Fund (IMF) has adjusted Mexico’s Gross Domestic Product (GDP) growth expectations for 2024 from 2.4% to 2.2%. This revision reflects Mexico’s ongoing economic slowdown, driven by a contraction in manufacturing observed in the first quarter of 2024, attributed to a deceleration in the US economy.
Additionally, inflation remains high, prompting the Bank of Mexico (Banxico) to maintain a cautious monetary stance. Investors are focused on Banxico’s interest rate discussions, with recent comments from Deputy Governor Omar Mejia Castelazo emphasizing the need for gradual rate adjustments.
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.
