Mexican Peso recovers on outlook for monetary policy

The Mexican Peso recovers after finding a floor.
The Peso gains support from the outlook for Mexico's monetary policy amid still high inflation.
USD/MXN steadily rises in a mildly bullish channel.

The Mexican Peso (MXN) is recovering on Monday after a week in which it lost between 1.3% and 1.6% in its most traded pairs, extending the downtrend – albeit at a slower pace – established since the April 2024 highs. The Peso is gaining as still-high inflation in Mexico suggests monetary policy could remain tight and interest rates elevated. This is supportive of the Peso as it attracts greater inflows of foreign capital.

Mexican Peso depreciates at slower pace

The Mexican Peso depreciated at a slower rate last week compared to previous weeks, both due to stubbornly high headline inflation in Mexico, which is making the Bank of Mexico (Banxico) cautious about making further cuts to interest rates, and the weakness of its counterparts, in particular the US Dollar.

Although Mexican core inflation is steadily falling back towards the Banxico’s 3.0% target after registering a 4.05% rise in core prices in July, headline inflation remains elevated and actually accelerated for the fifth month in a row to 5.57% in July from 4.98% previously.

Banxico cut interest rates by 0.25% to 10.75% at its August meeting but the vote was a close call as two of the Bank’s five-strong board – Jonathan Heath and Irene Espinosa – dissented due to continued concerns about elevated headline inflation.

In a speech on Thursday, Heath – one of the dissenters – said that there was “still no certainty” as to when food prices would cool, according to El Financiero. The rising cost of fruit is a key contributor to the elevated headline rate of inflation.

Although Heath added that Banxico expected food prices to fall, he added that there was no way of knowing “when and by how much”. Stubbornly high inflation in the services sector of the economy was another factor keeping overall inflation elevated, he added. Heath's uncertainty suggests he may continue voting against easing policy in future meetings. If interest rates remain high in Mexico, it will be a supportive factor for the Peso, since higher interest rates attract greater capital inflows.

Mexican payrolls data shows slowdown in hiring

A further factor that could influence Banxico’s decisions on monetary policy are continued signs of a slowdown in the labor market. Mexican payrolls rose at their slowest pace in 40 months, increasing by only 58,047 in August, according to data from IMSS, which measures the number of new contributors to social security.

A combination of slowing economic growth, lower growth forecasts, employers delaying hiring because of uncertainty due to concerns around the government’s reforms to the judiciary and the outcome of the US presidential elections, were factors impacting the creation of new jobs, according to El Financiero.

Subdued employment in Mexico may encourage the Banxico to be bolder in cutting interest rates despite high inflation, which, in turn, could be a negative factor for the Peso.

At the time of writing, one US Dollar (USD) buys 19.86 Mexican Pesos, EUR/MXN trades at 21.94, and GBP/MXN at 26.00.

Technical Analysis: USD/MXN trades in a mildly bullish channel

USD/MXN has pulled back down from the new 2024 highs it touched at 20.15 on Thursday and is currently trading back inside a familiar range in the 19.90s.

The bearish Shooting Star Japanese candlestick the pair formed on Thursday failed to gain confirmation and follow-through lower. Instead, the pair continued a mildly bullish rising channel between the 20.15 high and lows in the mid 19.80s.

USD/MXN 4-hour Chart

The channel itself is unfolding within a broader rising channel that began from the April 2024 lows.

The overall trend remains bullish, and since according to technical analysis theory “the trend is your friend,” this favors more upside. As such, any weakness may be temporary before the pair rallies again.

A break above the top of the mini-channel and 20.15 high of the year, would provide added confirmation of a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.

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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