Mexican Peso edges higher in trade on Thursday

• The Mexican Peso trades marginally higher on Thursday after a strong start due to global risk appetite. 
• The Peso weakened across the board on Wednesday after the Fed announced a mega 0.50% rate cut. 
• USD/MXN is consolidating at the base of a rising channel and the 50-day SMA. 

The Mexican Peso (MXN) edges higher in its most heavily-traded pairs during on Thursday, after a stronger start in which it rose as global stocks rallied amid an upbeat risk tone, that is generally positive for emerging market FX. 

On Wednesday, however, the Peso lost ground following the US Federal Reserve’s (Fed) decision to cut interest rates by a larger 0.50% at its meeting. MXN weakened by an average of 1.1% against the US Dollar (USD), Euro (EUR), and Pound Sterling (GBP) on the day.  

The Mexican Peso was probably not helped by comments from Victor Manuel Herrera, President of the National Economic Research Committee at Instituto Mexicano de Ejecutivos de Finanzas (IMEF) on Wednesday. Herrera said that the Mexican government’s controversial judicial reforms and the scrapping of independent industry regulatory bodies might harm the Mexican economy by reducing its attractiveness to foreign investors, especially from the US.

Mexican Peso still overvalued – Capital Economics

The Mexican Peso remains overpriced, according to London-based advisory service Capital Economics, and given the state of Mexico's precarious public finances, is, therefore, set for further declines in the future. 

Well-publicized concerns about the left-leaning government’s radical constitutional reform plans aside, the country's public finances are in poor shape, and Mexico's indebtedness puts the economy at risk. 

“President-elect Sheinbaum, protégé of the outgoing President Amlo, will inherit a myriad of economic issues. Most notably, the deteriorating public finances that are compounded by the heavily indebted state oil firm, Pemex, and could threaten Mexico’s investment grade sovereign credit rating,” says Joe Maher, Assistant Economist at Capital Economics. 

Another factor weighing on the Peso is the unwinding of the so-called “carry trade,” in which investors borrow in a currency where interest rates are low, such as the Japanese Yen (JPY), and use the loan to buy a currency where interest rates are high, like the Peso. As long as the Peso does not depreciate against the Yen, those investors stand to earn the difference in the interest repayments on the Yen loan and the interest earned by being in Pesos. However, since the Yen has begun appreciating on the back of expectations that the Bank of Japan (BoJ) will raise interest rates, the carry trade has lost its luster.

Maher sees further downside pressure on the Peso from being overvalued on a Price Purchasing Parity (PPP) basis. 

“The Peso has room to weaken further. For example, it is still somewhat stronger than what is implied by relative price levels in the US and Mexico,” says the Assistant Economist

That said, the Mexican currency will gain some support from upbeat risk appetite. Capital Economics’s base case is that the US economy will avoid a recession, and if this holds true then the Peso should see gains. 

“If we are correct in thinking that the US economy will avoid a recession, global risk appetite will probably stay strong, which would support Mexican assets and the peso,” he adds.

Nevertheless, Capital Economics revises down its forecasts, expecting the Peso to weaken to USD/MXN 20.00 by the end of 2024 and 21.00 by the end of 2025. 

Technical Analysis: USD/MXN consolidates near bottom of channel

USD/MXN is consolidating near the bottom of a long-term rising channel. 

The pair declined last week after forming a Three Black Crows Japanese candlestick pattern (shaded rectangle in the chart below). The pattern indicates prices could fall even further in the short term. Key support from the base of the channel and the 50-day Simple Moving Average at 19.02, however, stand in the way. 

USD/MXN Daily Chart 

USD/MXN could extend weakness a little to the lower channel line at around 19.01 and the 50 SMA nearby. Despite being in a short-term downtrend, these firm support levels will be tough nuts for bears to crack. There is a risk that USD/MXN will simply stabilize and use the support shelf to launch a recovery within the channel, thereby extending the medium and long-term uptrends. 

A decisive break below the lower channel line and 50 SMA would be required to alter the outlook and indicate a continuation of the down move. 

A decisive break would be one accompanied by a long red candle that pierced well below the channel line and closed near its low, or three down days in a row that broke clearly below the line.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

How do decisions of the Banxico impact the Mexican Peso?

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling 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. On the contrary, lower interest rates tend to weaken MXN.

How does economic data influence the value of the Mexican Peso?

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

How does broader risk sentiment impact the Mexican Peso?

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

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