The Mexican peso is extending its downtrend, but at a slower pace

VaselineSeptember 9, 2024

0 4 minutes read

The Mexican peso is extending its downtrend, but at a slower pace

The Mexican peso is extending its downtrend but seems to be finding a level.
Weakness in rivals such as the US dollar as well as uncertainty about the direction of Mexico’s monetary policy are supportive factors.
USD/MXN is steadily rising in a slightly ascending channel.

The Mexican peso (MXN) is trading flat and mixed on Monday, after a week where it lost between 1.3% and 1.6% against its most traded pairs, extending the downtrend – albeit at a slower pace – established from the April 2024 highs.

The peso is depreciating due to a combination of investor concerns over controversial new judicial reforms, uncertainty over the US presidential election and its impact on trade and the development of shipping trade – now less attractive since the peso started to fall.

The Mexican peso is depreciating at a slower rate

The Mexican peso depreciated last week at a slower pace than in previous weeks, both because of stubbornly high headline inflation in Mexico, which makes the Bank of Mexico (Banxico) wary of further interest rate cuts, and because of the weakness of his counterparts. , especially the US dollar.

Although Mexican core inflation is steadily falling towards Banxico’s 3.0% target after posting a 4.05% increase in core prices in July, headline inflation remains elevated and actually accelerated for a fifth month consecutively, to 5.57% in July, from 4.98% previously.

Banxico cut interest rates by 0.25% to 10.75% at its August meeting, but the vote was a close call as two of the Bank’s five board members – Jonathan Heath and Irene Espinosa – dissent due to continued concerns about high headline inflation.

In a speech on Thursday, Heath – one of the dissidents – said “there is still no certainty” about when food prices will come down, according to El Financiero. The rising cost of fruit is a key factor in the overall high rate of inflation.

Although Heath added that Banxico expected food prices to drop, he added that there was no way to know “when and by how much.” Stubbornly high inflation in the services sector of the economy was another factor keeping headline inflation high, he added. Heath’s uncertainty suggests he may continue to vote against easing policy in future meetings. If interest rates remain high in Mexico, this will be a supportive factor for the Peso as higher interest rates attract higher capital inflows.

Mexican payroll data shows a slowdown in hiring

Another factor that could influence Banxico’s monetary policy decisions are continued signs of a labor market slowdown. Mexican payrolls grew at their slowest pace in 40 months, rising by just 58,047 in August, according to IMSS data, which measures the number of new contributors to social security.

A combination of slowing economic growth, lower growth forecasts, employers delaying hiring due to uncertainty over concerns about government justice reforms and the outcome of the US presidential election were all factors that weighed on job creation. , according to El Financiero.

Low employment in Mexico may encourage Banxico to be bolder in cutting interest rates despite high inflation, which in turn could be a negative for the Peso.

At the time of writing, one US dollar (USD) buys 19.94 Mexican pesos, EUR/MXN trades at 22.08 and GBP/MXN at 26.14.

Technical Analysis: USD/MXN is trading in a slightly ascending channel

USD/MXN has declined from fresh 2024 highs hit at 20.15 on Thursday and is currently trading in a familiar range in the 19.90s.

The Japanese bearish Shooting Star candlestick that the pair formed on Thursday failed to gain confirmation and follow-through lower. Instead, the pair continued a slightly bullish bullish channel between the high and low of 20.15 in the mid-19.80s.

USD/MXN 4 Hour Chart

The channel itself unfolds within a broader rising channel that started from the April 2024 lows.

The general trend remains bullish and since according to the theory of technical analysis, “the trend is your friend”, this further favors the upside. As such, any weakness may be temporary before the pair rises again.

A break above the top of the mini-channel and the high of 20.15 for the year would provide further confirmation of the continuation of the bull trend, with the next target at the upper channel line in the 20.60s.

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.

VaselineSeptember 9, 2024

0 4 minutes read