Mexican Peso caught in crossfire as US-China trade tensions increase
Most recent article: Mexican Peso tumbles brushes aside broad US Dollar weakness across the board
- Mexican Peso treads water after failing to clear support at 20.30.
- Mixed economic data in Mexico weighed on the Mexican currency.
- Traders await Banxico’s monetary policy meeting and Fed speakers.
The Mexican Peso (MXN) registered losses against the US Dollar (USD) on Tuesday, but still it remains up in the week after United States (US) President Donald Trump delayed tariffs on Mexico, following discussions held with Mexican President Claudia Sheinbaum. The USD/MXN trades at 20.47, up 0.74%
The USD/MXN pair has found strong support near the 20.30 area despite losing over 1.30% on Monday. Yesterday, the US and Mexico reached an agreement to pause tariffs a month from now, as President Sheinbaum compromised to increase security at the border to stop drug traffic and illegal migration.
Investors cheered the news as risk appetite improved, and the Mexican currency finished strong in Monday’s session.
In addition, Mexico’s economic data revealed that January’s Business Confidence improved, though business activity contracted, according to S&P Global. Manufacturing activity contracted for the seventh straight month in January, indicating that the economy is slowing down.
Meanwhile, US job openings dropped by the most in 14 months, according to US Department of Labor data. The data revealed that the labor market and the economy remain strong, keeping the Federal Reserve (Fed) on hold at least until June.
Given the backdrop, further upside in the USD/MXN is seen, though traders must be aware of Fed official speakers during the rest of the day. Ahead in the week, Banco de Mexico (Banxico) is expected to cut rates by Thursday.
Uncertainty surrounds the size of the cut, as some Central Bank officials had opened the door for larger than a quarter of a percentage point of easing.
Daily digest market movers: Mexican Peso on the defensive as the Greenback counterattacks
- Mexico's Business Confidence deteriorated slightly from 52.0 in December to 51.4 in January, revealed the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). The manufacturing sub-component grew from 51.4 to 51.7 for the same period.
- S&P Global Manufacturing PMI in January dropped from 49.8 to 49.1, showing that manufacturing activity is slowing down.
- Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, said: “Mexican manufacturers began 2025 on a weaker footing, going deeper into retrenchment mode as current demand conditions and a bleak outlook prompted them to seek cost savings and protect cashflows.”
- Banxico’s private economists survey showed that Mexico’s economy is expected to grow by 1% in 2025, down from 1.2% in December. Inflation is expected to tick higher from 3.80% to 3.83%, while core prices are foreseen at 3.74%, up from 3.72%.
- Economists estimate the USD/MXN pair exchange rate to finish the year at 20.90, up from 20.53 in December, and estimate 150 basis points of easing from Banxico.
- US Job Openings and Labor Turnover Survey (JOLTS) in December dipped from 8.156 million to 7.6 million, below estimates of 8 million.
- Money market fed funds rate futures are pricing in 48 basis points (bps) of easing by the Federal Reserve in 2025.
USD/MXN technical outlook: Mexican Peso weakens past 20.50 as buyers target 20.90
The USD/MXN has recovered after hitting a five-day low of 20.39 as Trump paused tariffs on Mexico. During the North American session, the exchange rate climbed above the 50-day Simple Moving Average (SMA) of 20.42, opening the door for further upside.
A daily close above the psychological 20.50 area could pave the way to test the previous yearly high of 20.90. If surpassed, look for the current year’s high at 21.29.
Conversely, if sellers push USD/MXN below 20.30, it could fall to the 100-day SMA at 20.15. ahead of the 20.00 figure.
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.
