The Mexican peso is recovering as market sentiment improves

VaselineAugust 28, 2024

0 4 minutes read

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.

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 28, 2024

0 4 minutes read