Mexican Peso recovers, Obrador says Peso backed by “strong economy”
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- The Mexican Peso bottoms out after falling to 18-month lows midweek.
- President Obrador hits back at critics and speculators, defending his judicial reforms.
- USD/MXN pulls back from 18.99 peak but continues trading with a bullish tone.
The Mexican Peso (MXN) recovers on Thursday after bottoming out at an 18-month low due to politically-inspired market jitters.
USD/MXN in particular is falling, following the release of US Producer Price Index (PPI) data, showing a deflationary decline of 0.2% month-over-month in May, according to the US Bureau of Labor Statistics. This comes after a revised 0.5% rise recorded in April, and is below the 0.2% consensus estimate.
The PPI data, informally known as "factor gate price" inflation, suggests the Federal Reserve (Fed) could move to cut interest rates sooner than previously thought. This is likely to depreciate the US Dollar (USD) since lower interest rates attract less foreign capital inflows.
The Mexican Peso has depreciated around 10% since the Mexican elections on June 2. The Peso is falling on concerns about the impact of a controversial package of reforms the newly-elected, left-leaning coalition government, Sigamos Haciendo Historia (SHH), is seeking to pass and enshrine in the constitution.
The proposal to reform the judiciary is making markets particularly anxious apparently, because it would see judges elected by popular vote rather than appointment. Critics say the reforms would compromise the independence of the judiciary, frightening off foreign investors; supporters argue it will eradicate endemic corruption and attract more investment.
At the time of writing, a single US Dollar (USD) buys 18.65 Mexican Pesos (compared to circa 17.00 just prior to the election). EUR/MXN, meanwhile, is trading at 20.17 and GBP/MXN at 23.88.
Mexican Peso to stay strong because of the economy, says Obrador
The Mexican Peso bottomed out at a one-and-a-half-year low on Wednesday as President Andres Manuel Lopez Obrador (AMLO) hit back at critics of his policies during a press conference.
“They don’t like it (the reforms) and so they are applying pressure to gauge whether there is fear in the markets,” said AMLO during his daily broadcast. “Our economy is very strong, thankfully. So how long are they going to keep stoking concerns – in the television, in the radio, in the newspaper columns of financial experts? And they know how to move the markets. But today the Peso has recovered 1% against the US Dollar because we have a strong economy and healthy public finances,” he added.
Obrador argued that Mexico’s strong economy was as a result of the government’s war on corruption. Critics argue the economy is not strong as Obrador says, pointing to the record high Budget Deficit of 5.0% clocked up in 2023.
At his press confernece, AMLO went on to say that the Peso’s fall was due to speculators not investors, and that real investors would welcome his reforms because they wanted a “real” government whilst speculators wanted a “bowlegged” government – “It is the latter who don’t want reforms to clean a corrupt judiciary,” he added.
When asked at what point the depreciation of the Peso would begin to concern him, AMLO said there was no problem with the Peso. Rather, the corrupt elites were stirring market sentiment in an attempt to blackmail the government into ditching its reforms so they could hang onto their power and privileges, he added.
Obrador then pointed at a graphic behind him showing the changes in the value of the Peso under the last six Presidents. His administration was the only one under which the Mexican Peso had risen and not fallen in value.
When asked how soon it would be before the reforms to the judiciary would be passed, AMLO said, given their importance, “September”. Mexico’s congress is expected to convene on September 1, which would give López Obrador a one-month window to push through reforms before retiring.
To the argument that there would not be a clear separation of powers in the case where judges were elected, AMLO countered, “On the contrary, there would be more separation, since the appointment of judges would not depend on a minority but the population at large.”
The Peso, in particular, bounced against the US Dollar (USD) as it was aided by USD weakness. The release of cooler-than-expected US inflation data on Wednesday in the form of the Consumer Price Index (CPI), increased the chances the US Federal Reserve (Fed) will cut interest rates in September. Lower interest rates are negative for the Dollar as they attract less foreign capital inflows.
Technical Analysis: USD/MXN almost peaks at 19.00 and rolls over
USD/MXN pulls back in the last 24 hours after peaking at 18.99. Despite falling to the 18.70s, it continues trading with a bullish bias on Thursday.
USD/MXN is in a short and intermediate term uptrend after decisively breaking above key resistance at 18.49 (October 2023 high).
USD/MXN Daily Chart
Given “the trend is your friend,” the odds favor a continuation higher in the short term, with the next target potentially situated at 19.22 (March 2023 high).
The Relative Strength Index (RSI) is in the overbought zone, however, suggesting traders should not add to their long positions. It also increases the possibility of a pullback developing, although the established uptrend is likely to eventually resume.
The direction of the long-term trend is in doubt after the break above the October 2023 high. Previous to that, it was down.
Mexican Peso FAQs
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.
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.
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.
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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