Mexican Peso resumes uptrend after pause

Most recent article: Mexican Peso hits four-week high on hawkish Banxico remarks

The Mexican Peso resumes its uptrend after a pause.
US data was mixed on Thursday leading USD/MXN to pause before another bout of selling.

The Mexican Peso (MXN) trades higher in its key pairs on Friday continuing to make gains against the US Dollar (USD) in line with the trend from earlier in the week, whilst market sentiment remains relatively calm heading into the weekend.

At the time of writing, USD/MXN is trading at 16.63, EUR/MXN at 18.07 and GBP/MXN at 21.09.

Mexican Peso stable after midweek volatility

The Mexican Peso gains in its major pairs following a pause. On Thursday the US released a mixed bag of data that did not really change the outlook for the economy or interest rates, a key driver for FX. The same went for Europe and the UK.

Regarding the US data, the results were as follows:

Initial Jobless Claims came in at 222K in the week ending May 10, which was above the 220K expected but below the upwardly revised 232K of the previous week.
The number of Building Permits awarded – said to be a leading indicator for the economy – fell to 1.44M in April, which was below the 1.48M expected and 1.47M previous.
Housing Starts in April rose to 1.36M from 1.29M previously, but not as much as the 1.42M economists had expected.
The Philadelphia Fed Manufacturing Survey came in at 4.5 in May, below the 8 forecast and the 15.5 previously.
US Industrial Production flatlined in May, coming in at 0.0% when analysts had expected a 0.1% rise, the same as the previous month.

Apart from the data, several US Federal Reserve (Fed) officials commented on Fed monetary policy, but their words were interpreted as neutral and had little impact.

The President of the Richmond Fed Thomas Barkin said inflation is coming down, but that it will “take more time” to hit the Fed’s target.

Cleveland Fed President Loretta Mester, meanwhile, welcomed the latest CPI data but said monetary policy is well-positioned.

Atlanta Fed President Raphael Bostic said he was pleased with the progress on inflation in April but that the Fed needed to “be patient and vigilant.”

In Europe, European Central Bank (ECB) executive board member Isabel Schnabel, meanwhile, said an interest rate cut in June may be appropriate but the “path beyond June is much more uncertain.”

So, to sum up, no big changes there and business as usual.

Technical Analysis: USD/MXN threatens to go lower

USD/MXN – the value of one US Dollar in Mexican Pesos – trades lower again, resuming Wednesday's sell-off.

The pair could be unfolding a Bear Flag continuation pattern, although it is still early to say for sure.

USD/MXN 4-hour Chart

Ever since breaking out below the bottom of its range at 16.86 on May 9, the pair has looked like it has been in a short-term downtrend, favoring shorts over longs.

If USD/MXN breaks below the May 15 lows of 16.64, it will probably confirm the start of the next leg lower.

More downside would likely reach the conservative target for the breakout of the mid-April to May range at 16.54, which is the 0.618 Fibonacci ratio of the height of the range extrapolated lower. Further bearishness could even reach 16.34, the full height of the range extrapolated lower.

Given the medium and long-term trends are bearish, the odds further favor more downside.

It would take a recovery and decisive break back inside the range (above 16.86) to reverse the downtrending bias.

A decisive break would be one accompanied by a longer-than-average green candlestick that closed near its high or three green candlesticks in a row.

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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