The Mexican Peso (MXN) recovers roughly three quarters of a percent in its most traded pairs on Friday despite a dovish tilt to the Bank of Mexico (Banxico) policy meeting on Thursday. Banxico decided to leave interest rates unchanged at 11.00% and although the decision was widely expected, the change in the language of the statement and the division of voting were not.Â
These changes suggest Banxico is more likely to cut interest rates in the future than was previously supposed (dovishness). This, in turn, had a moderately weakening effect on the Mexican Peso, since lower interest rates are generally bearish for currencies because they attract lower foreign capital inflows.Â
At the time of writing, one US Dollar (USD) buys 18.30Â Mexican Pesos, EUR/MXN is trading at 19.58, and GBP/MXN at 23.14.
The Mexican Peso recovers the losses incurred following the Banxico policy meeting. Several changes to the language of the accompanying statement and the inclusion of a single vote to cut interest rates – by Omar Mejia – were new developments that gave the meeting a dovish slant.Â
The key changes to the statement were as follows:Â
USD/MXN rose after the Banxico meeting to touch a weekly high of 18.60, however, it has since fallen back down to the 18.30s.Â
The pair moved up after the formation of a three-wave ABC correction. This suggests the possibility the pair might not be correcting the short-term downtrend but instead has entered a short-term uptrend.Â
However, the evidence is not strong either way and ultimately the direction of the short-term trend is unclear at the moment. Â
A move below 18.06 (June 26 low) would suggest the downtrend was resuming and probably see a continuation down to 17.87 (June 24 low).
Alternatively, if USD/MXN rallies and breaks above 18.60 (June 28 high), it is likely to continue up to 18.68 (June 14 high), followed by 19.00 (June 12 high). A break above 19.00 would provide strong confirmation of a resumption of the short-and-intermediate term uptrend.
The direction of the long-term trend remains in doubt.Â
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 MexicoÂ’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.
Leave a Reply