The Mexican peso is recovering as market sentiment improves

• Mexican peso strengthens as risk appetite improves.
• Recent mixed US data allays fears of a hard landing for the US economy.
• Political risk remains a negative background factor for the Peso.

The Mexican peso (MXN) is trading higher across its key pairs on Wednesday amid a cautiously bullish market mood. European shares are trading modestly higher, and the growing view that the US Federal Reserve (Fed) will be able to cut interest rates in an orderly manner – avoiding disruption to the economy – is further fueling investors’ appetite for risk.

More low-level data from the US emerged in recent days, painting a mixed picture and helping ease fears that the economy is headed for a hard landing. These included stronger-than-expected consumer confidence in August and a rise in US durable goods orders in July released on Monday, although pessimism about the labor market persisted and the Richmond Fed manufacturing index fell below estimates.

The Mexican peso is facing pressure from political factors

The Mexican peso, meanwhile, has been pressured in recent sessions by a resurgence of debate over reforms the new Morean-led government is planning for the Mexican judiciary. The proposed changes would make judges and magistrates elected by popular vote; critics say this will undermine justice, democracy and investor confidence in Mexico. ¡

On Monday, the new reforms were voted through a committee for debate in the lower house in September, when parliament opens, according to ABC News. Disagreement over the reforms led to public demonstrations in Mexico City by members of the judiciary. The US ambassador to Mexico, Ken Salazar, said that “the direct popular election of judges is a major risk to the functioning of democracy in Mexico.”

Salazar’s criticism led the Mexican government to “suspend” diplomatic relations with the US and Canada. If the impasse escalates, there is the potential for it to negatively impact free trade between the three countries, with negative implications for the Mexican peso. This would be especially the case if former President Donald Trump were to win the presidential election.

The severing of diplomatic ties comes at a time when Mexico could potentially benefit from an escalating trade war between North America and China. News on Tuesday revealed that Canada has decided to raise tariffs on Chinese electric vehicle (EV) and steel imports by 100% and 25% respectively.

However, the decision could benefit Mexico because of its existing role as an intermediary manufacturer of Chinese electric vehicles. These, destined for North America, are not subject to punitive tariffs because of the free trade agreement that exists between the US, Canada and Mexico, according to Bloomberg News.

At the time of writing, one US dollar (USD) buys 19.64 Mexican pesos, EUR/MXN trades at 21.89 and GBP/MXN at 26.00.

Technical Analysis: USD/MXN extends leg higher within rising channel

USD/MXN is moving up in a rising channel and the established uptrend favors longs over shorts.

The pair broke through a key high that was limited to 19.52 (August 23 high), giving new impetus to the uptrend. A break above 19.80 would confirm more gains towards the upper channel line in the 20.60s.

USD/MXN 4 Hour Chart

The Relative Strength Index (RSI) just broke out of overbought and fell back into neutral territory. This is a sell signal and indicates a pullback within the uptrend. Such a correction will likely find support at the 19.52 level (previous resistance has turned into support) and possibly resume its upward trend from there.