- The Mexican Peso continues depreciating on Wednesday after Tuesday’s sell-off following weak retail sales data.
- Carry trade outflows and investor concerns regarding judicial reforms are also weighing on the MXN.
- Technically, USD/MXN may be starting a new leg higher within its rising channel.
The Mexican Peso (MXN) edges lower in its most heavily-traded pairs during the European session on Wednesday. The Peso fell between 1.50% and 2.00% in its key pairs on Tuesday after the release of Retail Sales data showed shoppers curtailed their spending in June.
The weak retail sales data could suggest inflation may be set to fall further, increasing the chances of the Banco de Mexico (Banxico) cutting interest rates further – a negative for the Peso, since lower interest rates attract less foreign capital inflows.
Lower interest rates could increase speculation investors are pulling out of their long Peso carry trade positions. With interest rates falling in Mexico and the Peso starting to trend lower too – whilst the opposite happens in Japan – the carry trade, which capitalizes from the interest rate differential between the two currencies, could see more outflows from the MXN.
Mexican Peso reverses trend after news of judicial reforms
The Mexican Peso reversed its temporary recovery rally from the August 5 lows after the Mexican government announced more details about their controversial judicial reforms on Friday, according to Commerzbank. These concerns, which some investors have interpreted as market unfriendly, led to a rapid depreciation in the currency after the June elections, and may have also contributed to the Peso’s generally weak tone over recent days.
USD/MXN in particular may see volatility on Wednesday with the publication in the US of the Quarterly Census of Employment and Wages (QCEW) for March. The data is benchmarked against US Nonfarm Payrolls (NFP) for comparison. If the census data differs from the NFPs it may lead to revisions in the latter.
Although the data will only cover the period to March 2024 (avoiding the latest and weakest payrolls), a big downward revision could revive fears that the US economy is heading for a hard landing. This, in turn, could weaken the US Dollar (USD). Additionally, the Federal Reserve will release the minutes from its July policy meeting.
For more macroeconomic news from Mexico, traders will have to wait for Thursday when 1st Half-Month Inflation for August and Q2 Gross Domestic Product (GDP) data will be published by INEGI.
At the time of writing, one US Dollar (USD) buys 19.06 Mexican Pesos, EUR/MXN trades at 21.21, and GBP/MXN at 24.82.
Technical Analysis: USD/MXN could be starting new up leg
USD/MXN gained over 1.7% on Tuesday, reversing the prior evolving down leg within the pair’s broader rising channel.
The long green up day posted on Tuesday means that the bearish Shooting Star candlestick pattern of the prior day failed to gain bearish confirmation. This could indicate the short-term trend is changing and the pair may be about to begin a new up leg within the channel.
USD/MXN Daily Chart
USD/MXN had been looking like it was unfolding in a bearish abc pattern within its rising channel, however, wave “c” has so far failed to extend all the way down to the lower channel line.
It is not clear what will happen next: it is possible the pair could recapitulate and start to move back down again, eventually reaching the lower channel line or at least the 50-day Simple Moving Average (SMA) lying just above at 18.43.
Alternatively wave “c” may have extended as far as it is going to go and the start of a new up leg is now unfolding. A break above the top of wave “b” at 19.10 would provide extra confirmation that a stronger up move was underway.
The overall trend on the medium and longer-term time frames is arguably up, suggesting a bullish backdrop that provides extra support to the view that a new upward move is underway.
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.
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