USD/MXN depreciates toward 19.00 due to improved risk appetite
- USD/MXN could limit its downside amid rising US Treasury yields.
- The Mexican Peso may struggle as the Banxico may reduce borrowing costs at Thursday’s meeting.
- CME FedWatch tool suggests 67.5% odds of a 50-basis point Fed rate cut in September, up from 13.2% last week.
USD/MXN trades around 19.30 during the early European hours on Wednesday after breaking its four-day winning streak. The Mexican Peso (MXN) gains ground due to possible improved risk appetite. However, the downside of the USD/MXN pair could be limited as US Dollar (USD) advances amid rising Treasury yields.
Mexico’s Auto Exports fell by 1.6% year-on-year to 271,496 units in July, breaking a streak of twenty consecutive months of growth. This decline highlights the ongoing economic slowdown, which, along with lower inflation readings, might prompt the Bank of Mexico (Banxico) to consider lowering borrowing costs at its upcoming meeting. Traders will likely observe the inflation data before the policy decision on Thursday.
The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 103.20 with 2-year and 10-year yields on US Treasury bonds standing at 4.00% and 3.90%, respectively, at the time of writing.
However, the upside of the USD/MXN could be retrained due to increasing odds of a relatively higher rate cut starting in September after the weaker US labor data for July raised the fear of a looming US recession. According to the CME FedWatch tool, there is now a 67.5% probability of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September, up from 13.2% a week earlier.
According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly noted on Monday that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.” Additionally, Chicago Fed President Austan Goolsbee stated that the central bank is prepared to act if economic or financial conditions worsen.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
