Mexican Peso edges lower ahead of central bank decisions

The Mexican Peso trades slightly lower, extending the mild weakening from Monday.
US Retail Sales data, the Fed policy meeting and BoE meeting are key events this week.
USD/MXN forms a bearish “Three Black Crows” Japanese candlestick pattern.

The Mexican Peso (MXN) edges lower on Tuesday after mildly retreating the prior day. This may be as a result of profit-taking after MXN’s average 3.9% rally last week against its most heavily-traded counterparts (the US Dollar (USD), the Euro (EUR), and the Pound Sterling (GBP)), or possibly trader caution ahead of the much-anticipated Federal Reserve (Fed) policy meeting announcement on Wednesday.

Mexican Peso trades tight ahead of Fed meeting

The Mexican Peso trades flat as the market debates the possibility that the Fed will cut interest rates by a double-dose 0.50% at their meeting on Wednesday, with the CME FedWatch tool now referencing a 67% probability of such a “jumbo” cut. This is more than double the probability of a 0.25% cut alone (33%). The chances of 0.50% have risen eight percentage points higher than yesterday’s 59%.

A cut to base interest rates in the US would widen the already substantial gap between the two countries and weaken the USD/MXN. In Mexico, the Bank of Mexico (Banxico) has set a base rate of 10.75% versus the Fed’s 5.25%-5.50% band. If the Fed cuts by 0.50%, as now seems likely, the Fed’s rate will fall to 4.75%-5.25%. This, in turn, will favor capital flowing to Mexico, where it can earn substantially more interest, resulting in increased demand for the Mexican Peso and its appreciation.

US Retail Sales data for August out at 12:30 GMT on Tuesday is the last major economic data release for the US prior to the conclusion of the Fed meeting on Wednesday. Economists expect a 0.2% rise month-over-month after a 1.0% rise in July. If the data undershoots, it will ratchet up the chances of a 0.50% cut even higher, and the opposite if it beats them.

Against the GBP, the Mexican Peso has weakened a little more over recent sessions as the Bank of England (BoE), scheduled to meet on Thursday, is seen as much less likely to cut interest rates. Yet the outlook for the Pound is far from positive as the latest Gross Domestic Product (GDP) data came out flat for July, undershooting economists’ expectations of 0.2% growth, so cuts are probably coming in the future, but with delays due to stickier inflation.

It is a similar story for the Euro, with Germany suffering slower growth but wage inflation remaining too high for the European Central Bank (ECB) to aggressively cut interest rates. Plus, the ECB has already begun cutting interest rates, so unlike the Fed, it is not playing “catch-up”. The just-released German and Eurozone ZEW sentiment survey showed a sharp fall in September suggesting more bad news on the economic front, and EUR/MXN pair is losing ground as a result.

Domestic politics has been another factor influencing the Mexican Peso ever since the June election. Initially, markets discounted the Peso due to fears about a fall in foreign investment due to proposed constitutional reforms by the Morena-led coalition government. These concerns have subsided recently, and one of the most controversial of them – the election rather than appointment of judges – passed into law on Sunday when outgoing president Andres Manuel Lopez Obrador signed an official decree, according to El Financiero.

At the time of writing, one US Dollar (USD) buys 19.25 Mexican Pesos, EUR/MXN trades at 21.44, and GBP/MXN at 25.44.

Technical Analysis: USD/MXN forms bearish “Three Black Crows” pattern

USD/MXN has broken out of a rising mini-channel within a wider rising channel and fallen for three days in a row. This has now formed a bearish Three Black Crows Japanese candlestick pattern on the daily chart (shaded rectangle), which indicates the probability that prices will fall even lower in the short term.

USD/MXN Daily Chart

The odds now favor the pair falling to the next downside support level at 19.01 (August 23 low), followed perhaps by further weakness to the 50-day Simple Moving Average (SMA) at 18.94 and the lower trendline of the larger channel a few pips below. At that level, the price will probably find firm support to stabilize and perhaps recover.

Even though the short-term trend is bearish, the medium and long-term trends are still bullish, suggesting the possibility that the pair could recover eventually and continue to trade higher.

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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