Mexican Peso advances sharply as traders eye Banxico's decision

Mexican Peso gains over 2%, trading at 19.26, ending a four-day decline against the Greenback.
Mexico's economic data shows slowdown in automobile production and exports; traders focus on Thursday's inflation data and Banxico policy decision.
Reuters poll: 12 of 22 economists expect Banxico to hold rates steady, while 10 anticipate a 25 bps cut.
Rabobank predicts Banxico will cut rates by 25 bps, with 50 bps of easing expected by year-end.

The Mexican Peso enjoys a healthy rally on Wednesday and snapped a four-day losing streak against the Greenback following Monday’s stock market massacre. Market players cheered words from Bank of Japan’s Deputy Governor Uchida, who said the BoJ would not raise rates if markets were unstable. This boosted the emerging market currency, which would be pressured as Thursday’s docket will be busy. The USD/MXN trades at 19.26 and plunges over 2%.

Sentiment improved after Uchida’s words, as reflected by Wall Street's rise between 0.65% and 1.62%. The US Dollar Index (DXY), which measures the buck’s performance against six currencies, edged higher by 0.26% to 103.19.

Mexico’s economic docket featured Automobile Production and Exports figures on Tuesday, with data showing a slowdown in both readings. Traders shrugged off the data, yet are preparing for Thursday’s docket, which will feature July inflation data and the Bank of Mexico (Banxico) monetary policy decision.

Regarding the latter, a Reuters poll showed that 12 of 22 economists expect the Bank of Mexico to hold rates unchanged, while 10 others expect a 25-basis-point (bps) rate cut.

Analysts at Rabobank expect Banxico to lower rates by 25 bps on a 3-2 split vote and expect 50 bps of easing between now and year-end.

In the US, investors continued to price in over 100 bps of cuts by the US Federal Reserve (Fed) via the Chicago Board of Trade (CBOT) December fed funds rate futures contract. Despite that, US Treasury yields are recovering some ground, with the 10-year benchmark note rate up three and a half bps to 3.932%.

Daily digest market movers: Mexican Peso counterattacks, ahead of crucial data

Mexico’s inflation is expected to aim up from 4.98% to 5.57% YoY, while monthly figures are expected to jump from 0.38% to 1.02% MoM.
Core inflation is foreseen dipping from 4.13% to 4.02% YoY and rising from 0.22% to 0.29% MoM.
On Friday, Mexico’s Industrial Production is expected to dip, which could put Banxico at a crossroads as headline inflation rises, while the economy stagnates
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 63.5%, down from 68% a day ago.

Technical analysis: Mexican Peso rebounds as USD/MXN slides beneath 19.30

Despite the ongoing correction during Wednesday's session, the USD/MXN rally remains in play. The Relative Strength Index (RSI) exited overbought conditions amid buyers' lack of effort to lift spot prices higher, yet they remain in charge and another attempt to test YTD high looms.

If USD/MXN edges above 19.50, the next stop would be 20.00. A decisive break will expose the YTD high at 20.22, followed by the 20.50 mark.

Conversely, if USD/MXN first support would be the 19.00 mark. Once cleared, this 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

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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