Mexican Peso continues rallying after Sheinbaum names cabinet

The Mexican Peso finds support after investors welcome incoming-President Sheinbaum’s cabinet picks.
Marcelo Luis Ebrard Casaubón will take the Economy portfolio.
High interest rates and a low probability of an interest-rate cut in June keep the Peso supported, analysts say.

The Mexican Peso (MXN) continues recovering on Friday on the back of optimism regarding incoming-President Claudia Sheinbaum’s top cabinet picks and the expectations that higher interest rates in Mexico will continue attracting foreign capital to its shores.

USD/MXN shrugs off higher-than-expected US flash S&P Global PMI data for June despite it showing a brighter outlook for both Manufacturing and Services sectors of the US economy, and supporting Dollar-pairs more broadly.

At the time of writing, one US Dollar (USD) buys 18.20 Mexican Pesos, EUR/MXN is trading at 19.45 and GBP/MXN at 23.00.

Mexican Peso regains investors confidence after cabinet choices

The Mexican Peso strengthened on Thursday after Claudia Sheinbaum’s announcement of six of her cabinet ministers was well received by markets. The list includes several leading academics and public servants who served with her during her time as Mayor of Mexico City.

Heading up the Economy Ministry will be Marcelo Luis Ebrard Casaubón, the former head of Foreign Affairs under President Andres Manuel López Obrador (AMLO). Ebrard Casaubón left the ministry in 2023 to run against Sheinbaum for the Morena party nomination. He has a long background in government administration and was President of the United Nations Global Network on Safer Cities, which focuses on fostering sustainable development. He thus shares Sheinbaum’s concerns about climate change.

“Ebrard will have to take on the renewal of a free trade agreement with the United States and Canada and increase foreign investment, another well-received announcement,” said Gabriela Siller, Director of Economic Analysis at Banco Base, to Associated Press (AP) News. Siller added that despite the appointment, market concerns had “not disappeared” following the election.

For the other roles, Sheinbaum chose Juan Ramón de la Fuente, former rector of her alma mater the National Autonomous University of Mexico (UNAM), as Secretary of Foreign Affairs.

Alicia Bárcena will serve as Secretary of Environment and Natural Resources.

Rosaura Ruiz Gutiérrez, a biologist who worked at UNAM and under Sheinbaum when she was Mayor of Mexico City, was chosen as head of a new ministry overseeing science, humanities, technology and innovation.

Ernestina Godoy, the Chief Prosecutor for Mexico City, was chosen as Sheinbaum’s legal adviser and Julio Berdegué Sacristán, an agronomist with a long academic trajectory, was her choice for the Secretary of Agriculture and Rural Development, reported Associated Press News.

High interest rates have Peso’s back – Rabobank

The Mexican Peso is likely to remain supported by the relatively high interest rates in Mexico (11.00%) which make it one of the most attractive currencies to buy in the carry trade, according to Christian Lawrence, Senior Strategist at Rabobank.

The “carry trade” is a type of investment in which investors borrow in a currency with low interest rates, like the Japanese Yen (JPY), and buy a currency with a high interest rate like the Mexican Peso.

“The main driver of MXN outperformance has been its position as the world’s most attractive carry currency and that remains true and will remain true in the coming months,” Lawrence told FXStreet.

This also makes it expensive for most traders to hold shorts positions in the Mexican Peso for long periods of time, he adds, reducing the chances of a long-term bearish change in trend.

Banxico to leave rates unchanged in July – Standard Chartered

The Mexican Peso is likely to continue benefiting from its relatively high interest-rate differentials as the Bank of Mexico (Banxico) will probably not make a further interest-rate cut at its June 27 meeting – as had previously been expected – analysts at Standard Chartered (SC) say in a note on Thursday.

“We now expect Banco de México (Banxico) to stay on hold instead of cutting by 25bps at its 27 June meeting, amid sharp currency depreciation driven by elevated political noise and fiscal uncertainty,” says the bank.

Currency depreciation will lead to imported inflation, according to SC, which will add to existing stubborn inflation in Mexico. This, in turn, will prevent the Banxico from pressing the trigger on rate cuts, supporting the Peso in the process.

Technical Analysis: USD/MXN continues correcting

USD/MXN continues leaking lower after rolling over from its 18.99 peak reached on June 12.

Whilst it is possible the correction could have further to run, the short and medium-term trends are still bullish, suggesting price will eventually turn around and start rising again. The next target higher is situated at 19.22 (March 2023 high).

USD/MXN Daily Chart

A break above June 14 high at 18.68 would provide additional confirmation of more upside towards the target at 19.22.

A break below 18.20 (June 10 low), however, would change the tone of the chart to one that is more bearish in the short-term. From there the next stop down could be 18.11.

The direction of the long-term trend remains in doubt after the break above the October 2023 high. Previous to that, it was bearish.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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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