Mexican Peso weakens after meeting technical resistance on Friday
|- The Mexican Peso trades lower in key pairs, reversing its recovery on Thursday.
- The Fed’s decision to cut interest rates in the US weighed on the US Dollar whilst uncertainty over tariffs is still a threat to the Peso.
- USD/MXN finds support at the 50-day SMA and remains in a broader uptrend.
The Mexican Peso (MXN) trades lower in its key pairs on Friday after rising up and meeting resistance near the top of a falling channel it has been steadily declining in since Mexico’s June elections.
Whilst the Peso initially weakened on Wednesday because of President elect Donald Trump’s victory in the US presidential election, it quickly bounced back. MXN's initial depreciation came on the back of concerns about the impact of Trump’s tariff-heavy agenda on Mexican exports to the US.
Pressure on the Peso eased, however, after the release of higher-than-expected Mexican headline inflation data for October suggested the Bank of Mexico (Banxico) might not be as aggressive in cutting interest rates as had previously been expected. This came to the Peso’s aid since elevated interest rates tend to attract greater inflows of foreign capital.
The Peso recovered further following the Federal Reserve’s (Fed) November policy meeting – which had an overall negative impact on the US Dollar (USD), as reflected by the three-quarter percent decline in the US Dollar Index (DXY) on the day. The Fed decided to cut the Fed Funds Target Range (FFTR) by 25 basis points (bps) (0.25%) to 4.50%-4.75% as expected, largely ignoring the market’s assessment of Trumponomics as likely to spur higher inflation.
The Fed’s accompanying statement made no direct reference to the potential impact of Trump’s economic agenda on the economy and the wording was little changed from the previous meeting. During his press conference, Fed Chairman Jerome Powell said he could not comment on the impact of Trump’s policies since he did not know the “timing, (or) substance of policy changes.” He also dismissed the rise in US Treasury bond yields as resulting from higher inflation expectations. Overall, it was as if the election had never happened.
Mexican Peso faces uncertainty from tariffs
The Mexican Peso is impacted by uncertainty regarding the impact of Donald Trump’s promised tariffs on Mexican goods entering the US.
Trump has threatened to place tariffs of 200% or even 300% on Chinese vehicles entering the US via Mexico. During the election campaign, Chinese investment in electric car plants in Mexico was put on hold due to uncertainty about the outcome. That said, some Mexicans remain optimistic about Chinese companies continuing to manufacture in Mexico.
“The arrival of Donald Trump to the US presidency will not discourage investments by Chinese electric vehicle manufacturers in Mexico, as they can focus on the local market and avoid exporting cars to US territory,” said Mexican financial consultant Luis Felipe Alcántara Pozos, to El Financiero.
Others have made the point that even if Trump imposes high tariffs, Mexico is still a gateway to a broader Latin America market.
Many of Trump’s tariff policies may actually be difficult to implement given the United States-Mexico-Canada Agreement (USMCA) free trade deal. This already stipulates that Mexican autos exported to the US must contain a high percentage of US components, so if tariffs were imposed on these vehicles, they would also have a detrimental impact on the US companies exporting components to Mexico.
US Congress election result could impact Peso
Trump has won the presidency and his Republican party also gained a majority in the United States (US) Senate. However, the US Congress is still up for grabs. On Friday, the Republican party had won 211 seats to the Democratic party’s 199, according to the Associated Press, with 25 still to be called. The threshold to obtain the majority of seats stands at 218.
If the Republicans win a majority in Congress, they will have a “clean sweep,” and Trump will be able to implement his policies with less friction and delay.
According to forecasts by El Financiero, a Republican majority in Congress with Trump as President could lead the Peso to weaken even further against the USD. They estimate a band of between 21.14 and 22.26 for USD/MXN in such a scenario. The pair currently trades in the 19.70s.
If the Republicans fail to win a majority in Congress, the pair is likely to end up in a range between 19.70 and 21.14, says El Financiero.
Technical Analysis: USD/MXN falls to support
USD/MXN weakens to support from the 50-day Simple Moving Average (SMA) at 19.70 after forming a bearish Long-Legged Doji candlestick on Wednesday, which was followed up and confirmed by a long red down day on Thursday.
USD/MXN Daily Chart
The Moving Average Convergence Divergence (MACD) momentum indicator has crossed below its signal line, giving a sell signal, another bearish indication.
However, USD/MXN remains within the guardrails of a rising channel and is still in an overall uptrend on a short, medium and long-term basis. Given the technical principle that “the trend is your friend,” the odds favor an eventual continuation higher.
A break above the 20.80 high set on Wednesday would probably confirm more gains, with 21.00 as the next key target and resistance level (round number, psychological support).
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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