Mexican peso pulls back on risk after Beijing halts stimulus

VaselineOctober 8, 2024

0 5 minutes read

Mexican peso pulls back on risk after Beijing halts stimulus

The Mexican peso eases as markets cut risk following a disappointing stimulus announcement in China.
The peso could see losses pared, however, as investors’ confidence in the new Sheinbaum administration increases.
USD/MXN breaks below the key 50-day SMA and tests the bottom of a major rising channel.

The Mexican peso (MXN) is pulling back in its key pairs after a more than week-long uptrend on Tuesday as a general risk-off mood pervades the markets, which in turn affects the risk-sensitive Peso.

During the Asian session, after a bright start, Chinese shares fell on news that a highly anticipated briefing by China’s state planner failed to deliver the expected levels of investment.

The Mexican peso falls on a risk-off tone for markets

The Mexican peso fell on Tuesday amid increasingly negative market sentiment triggered by disappointing news from Beijing. In common with other emerging market currencies, the Mexican peso tends to weaken when the global outlook turns bad.

An opening rally in China’s CSI 300 stock index was cut short after China’s National Development and Reform Commission (NDRC) chairman Zheng Shanjie announced just $28 billion in additional funds for local governments on Tuesday.

Despite the huge package of measures announced by the People’s Bank of China (PBoC) last week, the biggest liquidity pump since the Covid pandemic, investors saw the additional fiscal stimulus as inadequate for China to meet its growth targets for the year.

Asian shares pared early gains on the news, while commodities weakened substantially on a weaker global growth outlook and European shares traded in the red after the open.

Hot markets for the Sheinbaum administration

The downside for the peso may be limited, however, by reduced political risks as President Claudia Sheinbaum’s administration replaces that of her former incumbent, Andres Manuel Lopez Obrador (AMLO). Early signs are that markets are valuing it as more investment-friendly than its predecessor.

On Monday, the newly appointed coordinator of the government’s Business Advisory Council, businesswoman Altagracia Gómez, said she worked with 13 automotive companies with facilities in Mexico to jointly agree on a ten-point action plan to develop the industry key to the country’s automobile production. .

These included the global development of local suppliers, with a particular focus on micro, small and medium-sized enterprises (MSMEs), providing greater assurance of financing for companies, and improving skills training for industry, with a focus on youth integration. people in the workforce, El Financiero said.

The peso weakened 10 percent after Sheinbaum’s election in June on investor concerns she could carry the torch of her mentor AMLO’s radical reform program, which outsiders viewed as anti-market, undemocratic and, in the case of judicial reforms, as undermining independence. of the judges.

AMLO passed a controversial judicial reform bill as his last major act in parliament before handing over to Sheinbaum on October 1, which allowed judges to be elected rather than appointed. However, the new law has already faced delays due to a decision by the Supreme Court to review it, with a view to revising the contents if they are deemed to jeopardize the independence of judges.

Technical Analysis: USD/MXN drops below 50-day moving average

USD/MXN is falling below the 50-day simple moving average (SMA) and testing the bottom of a medium-term rising channel.

USD/MXN Daily Chart

USD/MXN could find firm support at the base of the channel and recover and start rising again. After all, medium and long-term trends are bullish, and given the principle of technical analysis that “the trend is your friend”, this favors a continuation higher.

On Friday, the pair formed a bullish Japanese hammer candlestick pattern at the base of the channel (orange rectangle in the chart above). This was followed by a slightly uptrending green Japanese Doji candlestick on the following day. This setup may mark a turning point for the short-term trend and the beginning of a recovery. Since then, however, the price has shown no signs of increasing.

In fact, the short-term trend remains bearish and the pair has now crossed below the 50-day SMA, a key level. A decisive break below the channel would risk reversing USD/MXN’s medium-term uptrend.

A decisive break would be one characterized by a longer-than-average bearish candlestick that broke cleanly below the channel line and closed near the low. Such a break would likely see a decline to an initial downside target at 19.00 (August 23 low, round number) and then 18.65, the 100-day SMA.

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, 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.

VaselineOctober 8, 2024

0 5 minutes read