Mexican Peso faces Banxico decision with an over 2% weekly depreciation
- Mexican Peso trades near lows of the day, USD/MXN above 19.50.
- Weak Mexican auto production and export data highlight economic slowdown, influencing market sentiment.
- Banxico may consider lowering borrowing costs at the August 8 meeting due to slower growth and lower inflation.
The Mexican Peso extended its daily losing streak to four against the Greenback. It remained above the psychological 19.00 figure for the third straight day after the exotic pair breached the previous year-to-date (YTD) high of 18.99. A light economic docket on both sides of the border keeps the Peso adrift to market mood dynamics. The USD/MXN trades at 19.58, climbing over 1%.
Risk appetite improved, yet the Peso failed to gain traction. Nevertheless, geopolitical risks could shift sentiment sour and spark a flock to safety, weakening most emerging market currencies against the US Dollar.
Auto Production in Mexico grew slower than in June, while Auto Exports plunged. This underscores the ongoing economic slowdown, which coupled with lower inflation readings can allow the Bank of Mexico (Banxico) to lower borrowing costs at the upcoming meeting on August 8.
In the US, the latest Institute for Supply Management (ISM) Services PMI exceeded estimates, hinting that the economy remains solid amid the dip in manufacturing activity, as reported by the ISM last Thursday.
The data calmed US recessionary woes as market players now expect just 110 basis points (bps) of monetary policy easing by the Federal Reserve (Fed) in 2024, compared to 150 bps a day ago.
Earlier, the US Balance of Trade posted a narrower deficit than last month, yet it missed the mark.
Daily digest market movers: Mexican Peso on the backfoot despite market mood improvement
- The Instituto Nacional de Estadistica Geografía e Informatica (INEGI) revealed that Auto Production in July rose 2.7% MoM, down from 3.8% in June. Auto Exports sank from 1.5% in June to -1.6% MoM.
- On Thursday, Mexico’s inflation is expected to rise from 4.98% to 5.57% YoY, while underlying figures are foreseen to dip from 4.13% to 4.02% YoY.
- The US Bureau of Economic Analysis (BEA) featured July’s Balance of Trade, which came at $-73.1 billion, down from $-75 billion, but missed the consensus of $-72.5 billion.
- US Exports and Imports grew from $262 billion to $265.9 billion and from $337 billion to $339 billion, respectively.
- Monday’s ISM Services PMI improvement from July faded fears that the US economy might hit a hard landing instead of a soft landing.
- The CME FedWatch Tool shows the odds of a 50-basis-point interest rate cut by the Fed at the September meeting at 86.5%, up from 74% last Friday.
Technical analysis: Mexican Peso depreciates sharply as USD/MXN rises above 19.30
The USD/MXN uptrend remains intact once it crosses the 19.00 psychological figure, opening the door for further upside. Momentum favors buyers, as depicted by the Relative Strength Index (RSI), which is bullish at overbought territory. Although this could pave the way for a pullback, once RSI normalizes, the trend could resume upwards.
The first resistance would be the psychological 19.50 mark. Once cleared, the next stop would be the 20.00 mark, followed by the current YTD high at 20.22.
Conversely, the USD/MXN first support would be the 19.00 mark. A breach of the latter will expose the August 1 swing low of 18.42, followed by the 50-day Simple Moving Average (SMA) at 18.17.
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.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
