Mexican Peso pares early gains after Retail Sales data

Most recent article: Mexican Peso strengthens amid hawkish Banxico and soft Retail Sales

• The Mexican Peso gives back some of the gains from its early rally after the release of weak Mexican Retail Sales. 
• The data wipes out gains made from hawkish remarks by a Banxico official Irene Espinosa.
• On Friday, Espinosa said she advocated for interest rates remaining high as inflation continued to be a problem.

The Mexican Peso (MXN) pares early gains on Monday after the release of Mexican Retail Sales data for March indicates the economy is cooling. The data suggests the Bank of Mexico (Banxico) may be more inclined to continue cutting interest rates from their historically high 11.00% level to stimulate spending.  

The Peso started Monday by rising after the Deputy Governor of the Bank of Mexico (Banxico), Irene Espinosa, said that she thought the Banxico should keep interest rates at their current high level (11.0%) as the battle with inflation was not yet over.

At the time of writing, USD/MXN is trading at 16.60, EUR/MXN at 18.05 and GBP/MXN at 21.07. 

Mexican Peso falters after weak Retail Sales data

The Mexican Peso weakened slightly after the release of March Retail Sales data which showed sales fell in March. On a monthly basis Retail Sales declined by 0.2% whilst on a year-over-year basis they showed a 1.7% fall, data from INEGI showed. This contrasted with February's results which showed a 0.4% increase MoM and 3.0% rise YoY. 

The data suggests the Mexican economy may be feeling the effects of high interest rates on the cost of credit and consumer spending. It could increase the chances the Banxico will continue cutting interest rates – a negative for the Peso since currencies with lower interest rates attract less foreign capital inflows. 

Mexican Peso boosted by Espinosa comments 

The Mexican Peso got a boost on Friday after Irene Espinosa said she did not see any “urgency in cutting interest rates”, according to Milenio.com. She further added that the Banxico’s decision to cut interest rates in March had been “premature”, according to Christian Borjan Valencia, Editor at FXStreet. 

Espinosa's views are consistent with her stance at the Banxico March meeting when she was the only member of the Banxico board not to vote for the decision to cut interest rates by 0.25% from 11.25%. They also contrast with the views of the Governor of the Banxico Victoria Rodriguez Ceja, according to Milenio.com. 

Technical Analysis: USD/MXN continues descent

USD/MXN – the value of one US Dollar in Mexican Pesos – edges lower on Monday after the steep sell-off at the end of the previous week, as traders continue exerting bearish pressure on the pair. 

USD/MXN 4-hour Chart 

The USD/MXN is falling in a short-term downtrend within a descending channel that favors short bets over longs. 

The next downside target is the conservative price objective calculated for the breakout of the mid-April to May range. This is situated at 16.54, the 0.618 Fibonacci ratio of the range's height extrapolated lower. Further bearishness could even see USD/MXN reach 16.34, the full height of the range extrapolated lower. 

The pair is meeting support at the lower base of the channel and could pull back before its next descent. 

The Relative Strength Index (RSI) momentum indicator is signaling oversold conditions, which indicates traders should not add to their short positions. If the RSI exits oversold and returns to neutral territory above 30, it would be a signal to close those positions as a correction is probably underway. Once the correction ends, however, the descending channel is expected to continue taking prices lower. 

Given the medium and long-term trends are also bearish, the odds further favor more downside.