The Mexican peso bottoms out after losing an average of 5% across key pairs

VaselineAugust 23, 2024

0 5 minutes read

The Mexican peso bottoms out after losing an average of 5% across key pairs

The Mexican peso is trying to find a bottom after losing an average of around 5% of its most traded pairs so far this week.
The weakness came as a result of lower inflation data, weaker retail sales and political factors.
Technically, USD/MXN is extending its uptrend in a rising channel.

The Mexican peso (MXN) traded right at weekly lows on Friday, following a three-day streak of losing at least more than 1.0% of its value on the day across the three most traded pairs (USD/MXN, EUR ). /MXN and GBP/MXN). This brings the total depreciation of the Peso so far this week to between 4.0% and 6.0%, depending on the pair in question.

A combination of lower-than-expected Mexican inflation data for August, weaker retail sales in July and resurgent concerns about the impact of the new government’s proposed changes to the Mexican constitution are weighing.

These factors, as well as the carry trade, where investors borrow in a currency where interest rates are low – such as the Japanese yen (JPY) – to buy a currency where interest rates are high – such as the peso – (therefore pocketing the differential) provides headwinds for the Peso.

Declining inflation in the first half of the Mexican month and core inflation in August point to a higher chance of a further 0.25% cut in interest rates in September. Because lower interest rates are negative for a currency – because they reduce foreign capital inflows – the MXN is pushed lower.

At the time of writing, one US dollar (USD) buys 19.49 Mexican pesos, EUR/MXN trades at 21.69 and GBP/MXN at 25.57.

The Mexican peso weakens the most against the British pound

The Mexican peso is weakening the most against the British pound (GBP), which is down 6.02% against it so far this week.

The pound was supported across all its pairs by higher-than-expected UK retail sales data and, more recently, survey data from key sector purchasing managers showing upbeat activity and an upbeat outlook across major groups industries of the economy.

The preliminary S&P Global/CIPS Composite Purchasing Managers’ Index (PMI) for August, for example, rose to 53.4 from 52.8 in July and beat estimates of 52.9. Both manufacturing and services PMIs also rose more than expected.

MXN Weakens Against Euro Despite Negative Data

Against the euro (EUR), the Mexican peso is down 5.57% so far this week despite weak data from the eurozone.

Eurozone negotiated wage rate growth in Q2 eased quite a bit to 3.55% from 4.74% in Q1, and the German HCOB PMI fell in August across all major sectors.

In addition, the large gains in the French PMI for services to 55.0 from 50.1 were almost exclusively caused by the temporary effect of the Paris Olympics, while the underlying French data remained weak, according to Capital Economics.

“Part of the improvement (in Eurozone PMI) appears to have been due to a temporary boost from the Paris Olympics. The composite PMI for France rose to a 17-month high, entirely due to very strong growth in the services index. But employment indices, output expectations and job delays all fell, suggesting that the underlying economic situation in France has actually worsened,” says Franziska Palmas, Senior Economist for Europe at Capital Economics.

Surprising losses on weaker US dollar

The Mexican peso is down 4.68% against the US dollar so far this week, despite the USD itself falling to new year-to-date lows, according to the US Dollar Index (DXY).

The USD was pressured by increased bets that the Fed will cut rates in September. The minutes of the Fed’s July policy meeting, for example, noted that the “vast majority” of participants noted that “it would probably be appropriate to ease policy at the next meeting (September 18).”

Additionally, the downward revision of 818,000 to Nonfarm Payroll (NFP) survey results for the 12 months to March 2024 reignited questions about the health of the US labor market. US PMI data for August was mixed.

Fed Chairman Jerome Powell’s speech at the central banking symposium in Jackson Hole on Friday could have an impact on dollar pairs, although he is expected to support the view that interest rate cuts will be on the way.

Technical Analysis: USD/MXN continues to rise in the rising channel

USD/MXN extends its rally in a rising channel.

After falling into a measured channel move that ended with a shorted final “c” wave, a new leg higher in the channel began to unfold.

USD/MXN Daily Chart

The up leg could take the pair back to the channel highs at around 20.50. A break above 19.61, the August 6 high, would provide further bullish confirmation.

The overall trend on the medium and long-term time frames is undoubtedly up, suggesting an optimistic backdrop that lends further support to the view that a new upward move is underway.

Frequently asked questions about the Mexican peso

The Mexican peso (MXN) is the most traded currency among its Latin American peers. Its value is largely determined by the performance of the Mexican economy, the policy of the country’s central bank, the volume of foreign investment in the country, and even the level of remittances sent by Mexicans living abroad, especially in the United States. Geopolitical trends can also move the MXN: for example, nearshoring – or the decision by some firms to relocate production capacity and supply chains closer to their home countries – is also seen as a catalyst for the currency Mexican, as the country is considered a key manufacturing hub on the American continent. Another catalyst for the 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 keep inflation at low and stable levels (at or near its 3% target, the midpoint in a tolerance band of 2% to 4% ). For this purpose, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus reducing 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. Conversely, lower interest rates tend to weaken the MXN.

Macroeconomic data is essential to assess the state of the economy and can impact the valuation of the Mexican peso (MXN). A strong Mexican economy based on high economic growth, low unemployment and high confidence is good for the MXN. Not only does it attract more foreign investment, it can encourage the Bank of Mexico (Banxico) to raise interest rates, especially if this force is associated with increased inflation. However, if economic data is weak, the MXN is likely to depreciate.

As an emerging market currency, the Mexican peso (MXN) tends to struggle during periods of risk, or when investors perceive broader market risks to be low and are therefore willing to commit to investments that carry more risk. great. Conversely, MXN tends to weaken during periods of market turbulence or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.

VaselineAugust 23, 2024

0 5 minutes read