Mexican Peso retreats again after three-day recovery

• The Mexican Peso trades slightly lower on Monday after a mild recovery. 
• The Peso gained as the effect of the Trump-trade wore off, Banxico upgraded its forecasts, and Mexico made a budget announcement. 
• USD/MXN could be starting a new leg higher after pulling back within its uptrend. 

The Mexican Peso (MXN) edges lower in its key pairs on Monday after three consecutive days of mild gains. These came partly on the back of revised forecasts by the Bank of Mexico (Banxico) at its November meeting on Thursday, an optimistic budget announcement from Mexico’s Economy Minister on Friday, and as the waning bullish effect of the “Trump-trade” on the US Dollar (USD). Despite the Peso’s three-day rebound, MXN is in a technical downtrend overall, suggesting vulnerabilities could lurk just out of sight. 

Mexican Peso recovery looks vulnerable 

The Mexican Peso slightly retreats on Monday after a weak recovery in the second half of last week after Banxico revised its forecast for inflation at the end of 2024 to 4.7% from 4.3%. The change suggests the central bank will probably not cut interest rates as aggressively as previously expected, propping up the Peso. The maintenance of elevated interest rates increases capital inflows into a country, supporting its currency. 

Nevertheless, Banxico went ahead with a 25 basis points (bps) (0.25%) cut at its policy meeting on Thursday, bringing its main interest rate down to 10.25% from 10.50% previously. The bank  continued to see the balance of risks “to growth of economic activity remained biased to the downside.”

Also on Thursday, Moody’s Ratings cut Mexico’s credit rating to Baa2 “Negative” from “Stable” as a result of a combination of the country’s high budget deficit, which is expected to end 2024 at 5.9% of Gross National Product (GDP), the highest it has been since the 1980s, and risks to the economy from the government’s reforms of the judiciary, which Moody’s views as threatening the rule of law and “eroding checks and balances” to power. 

“While our assessment of the quality of institutions in Mexico is already low compared to rating peers, particularly when it comes to rule of law and control of corruption, we will assess whether a further deterioration in the policymaking framework and the independence of the judicial system could limit the government's ability to address rising credit challenges," Moody's said.

The Mexican Finance Minister Rogelio Ramírez de la O responded to the downgrade by saying that Moody’s had not taken into account his proposed budget for 2025, which was published the following day. In the 2025 budget, Ramirez de la O forecast an increase in growth of between 2% and 3% and a budget deficit of 3.9% of Gross Domestic Product (GDP). 

The budget projection suggests an increase in growth from a rate of 1.5% to 2.5% in 2024 and a reduction in the deficit from the 5.9% expected by the end of 2024, according to Reuters. 

Technical Analysis: USD/MXN closes in on November high

USD/MXN has pulled back after rallying higher within a rising channel. The short-term trend is probably bullish but could also be sideways. The pullback from the November 12 high has found support at the 50-period Simple Moving Average (SMA) in the 4-hour chart (as seen below), and the pair could be about to start recovering. 

USD/MXN 4-hour Chart 

If USD/MXN extends a new leg higher, it could rally up to a zone between 20.80 (November 6 high) and 20.89 (61.8% Fibonacci extension of the prior rally). A cross of the blue Moving Average Convergence Divergence (MACD) above its red signal line would provide a buy signal and evidence supporting such a move higher. 

A break above 20.80 would confirm a higher high and an extension of the bullish trend and unlock the next upside target at 21.00 (round number, upper boundary of channel), where buyers could start to meet resistance. 

In case USD/MXN extends its correction lower, support lies in the 19.70s from the 50-day SMA (not shown) the early November lows and the lower boundary line of the rising channel just below.

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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