USD/MXN suffers worst decline since July, Mexican peso consolidates gains

• Mexican peso holds to gains, best performer on Monday on “no tariffs”.
• USD/MXN down 2.25% from Friday’s close, bearish gap remains open. 

The USD/MXN is having the biggest daily loss since last July amid a rally of the Mexican peso after US President Trump suspended indefinitely tariffs on goods from Mexico. The pair closed last week around 19.60 and as of writing, trades at 19.20.  Earlier today bottomed at 19.13 and then bounced to the upside finding resistance at 19.30. The Peso has been consolidating gains across the board over the last hours. 

“In the aftermath of the tariff announcement last month, USD/MXN traded at its highest level since December 27 near 19.88. After those tariffs were rescinded this past week, USD/MXN has retraced nearly that entire move higher. Looking at the bigger picture, USD/MXN has now retraced about a quarter of the December-March drop. Major retracement objectives of that drop come in near 19.43 (38%), 19.64 (50%) and 19.85 (62%). The 200-day MA comes in near 19.3640”, wrote Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman. 

To the downside in the short-term, support levels are seen at 19.15 and below 19.05 (uptrend line). The pair is back below the 20-day moving average (19.25) and if it holds under that line, the Mexican peso could strengthen. 

 From a fundamental perspective, the removal of tariffs has been extremely positive for the peso but last week, the currency was also hit by many rating downgrades, including Mexico’s debt that should have a lasting impact and could even affect economic expectations. Once the dust from the tariffs settles, growth risks could gain more attention. 

Beyond tariffs

Trade war developments, particularly US-China will likely continue to be a key driver for market sentiment. Regarding data, “Mexico reports April IP Tuesday, which is expected to contract -2.4% y/y vs. -0.1% in March. While the tariff risk has ended (for now), the economy has been slowing and a recession remains a distinct possibility. Yet Banco de Mexico cannot cut rates anytime soon due to the vulnerable peso. Next policy meeting is June 27, no change is expected then”, said 

In the US, the economic calendar looks busy with inflation numbers and retail sales data. “FOMC members enter their blackout period before the June 18/19 meeting, but economic data are unlikely to provide much to offset recent speculation of a rate
cut sooner rather than later. While we expect an above-consensus retail sales print, that’s largely driven by a rebound in autos and the underlying core sales component could disappoint amid weather impacts and slower employment growth. Core CPI infl ation is unlikely to accelerate further above 2%, and as such would be consistent with a core PCE reading still below that mark”, wrote Andrew Grantham, analysts at CIBC.