- The Mexican Peso has rebounded after hitting multi-year lows during the US presidential election.
- The Federal Reserve’s November meeting on Thursday could be pressuring the US Dollar.
- Mexican inflation data remains elevated in October, keeping the Peso supported.
The Mexican Peso (MXN) maneuvers a U-turn that an F1 driver would be proud of during the volatility accompanying the US presidential election. On Wednesday, the Peso took a beating as it became increasingly clear that President-elect Donald Trump would win the election. His vow of putting tariffs on Mexican imports – of between 25% and 300%, depending on which comments you take – was the main cause of MXN’s steep sell-off.
Yet, after Trump was actually “crowned Caesar”, MXN recovered and made back all its earlier losses. On Thursday, the Mexican Peso continues marginally outperforming its peers in its three most heavily traded pairs: USD/MXN, EUR/MXN and GBP/MXN.
The Peso retains its upbeat tone after the release of Mexican inflation data for the month of October on Thursday. Mexican 12-Month Inflation rose to 4.76% in the tenth month of the year, from 4.58% in September, and beat expectations of 4.72%.
Headline inflation rose by 0.55% in October from 0.05% in September and beat expectations of 0.53%, according to INEGI.
Core Infaltion, meanwhile, stayed the same as the previous month ar 0.28% and fell below the 0.33% expected.
The slightly higher inflation could reduce the chances that the Banco de Mexico (Banxico) will cut interest rates as aggressively in the months to come.
Mexican Peso bounces from multi-year low
The Mexican Peso leaps out of its grave as markets settle down following the tumult that accompanied Donald Trump’s victory over his rival Democrat candidate, Kamala Harris, in the 60th US presidential election.
Part of the Peso’s recovery – against the US Dollar (USD) at least – could be put down to the proximity of the US Federal Reserve’s (Fed) November meeting on Thursday, as the Fed is still expected to deliver a 25 basis point (bps) (0.25%) cut to US interest rates, despite the inflationary outlook from Trumponomics. Lower interest rates are negative for the Dollar since they reduce foreign capital inflows.
30-Day Fed Funds futures prices continue to show a 100% probability that the Fed will announce a 25 bps rate cut and even a slim 2.6% chance of a larger 50 bps (0.50%) reduction, according to the CME FedWatch tool. Strangely, this was not the case before the election result when markets saw no chance of a 50 bps cut and a circa 5% probability of the Fed not cutting at all. Additionally, swap rates are showing a high probability of another 25 bps cut coming down the pipe in December. If these predictions continue, the US Dollar is likely to see its upside capped for the time being in all pairs, including against the Mexican Peso.
A further reason for the Peso’s recovery could be the realization that much of Trump’s policies, such as his threats to place tariffs on Mexican imports, may be difficult to implement. The United States-Mexico-Canada Agreement (USMCA) free trade deal stipulates that Mexican car imports to the US must contain a high percentage of US components, for example. According to the US International Trade Administration, 49.2% of Mexican imported cars are made up of US-made parts. Adding punitive tariffs would, therefore, hurt US companies that supply those components. That said, it is also possible Trump could wish to have more of the manufacturing process repatriated, ultimately to Mexico’s detriment.
On the data front, Auto Exports in Mexico rose to 5.0% YoY in October from 4.8% previously and Auto Production declined to 1.1% YoY in October from 11.7% in the previous month. A positive for the Peso since relatively elevated interest rates increase foreign capital inflows.
Congressional win for Republicans could add pressure to Peso
Trump won the presidency by passing the 270 threshold of electoral votes required to win the race. He currently has 295 electoral votes to Harris’ 226, according to Associated Press. The Republican party also gained a majority in the United States (US) Senate – 52 over 44 – and is in the lead to win a majority in the US Congress, with 206 seats versus the Democrat’s 191 so far, although 38 have still to be called.
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 Mexican financial news website 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 is currently just above 20.00.
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 executes U-turn after peaking
USD/MXN shot to an over two-year high on Wednesday but promptly rolled over, eating back up all the prior gains.
USD/MXN 4-hour Chart
However, USD/MXN is in an overall uptrend on a short, medium and long-term basis. Further, it is trading in a bullish rising channel. Given the technical principle that “the trend is your friend,” the odds favor an eventual continuation higher.
The Moving Average Convergence Divergence (MACD) momentum indicator has crossed below its signal line, which is a bearish sign. However, it remains above its zero line, suggesting the trend remains bullish.
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).
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
Pound Sterling edges higher after BoE rate cut, focus shifts to Governor Bailey – LIVE
The Bank of England (BoE) lowered the policy rate by 25 basis points to 4.75% following the November meeting, as expected, and said that the budget is forecast to boost inflation. BoE Governor Bailey will speak on the policy outlook in a press conference next.
EUR/USD clings to gains above 1.0750 amid US Dollar pullback
EUR/USD holds higher ground and trades above 1.0750 on Thursday. The pair finds support from a broad US Dollar retreat, as traders unwind their Trump win-inspired USD longs ahead of the Federal Reserve's highly-anticipated policy announcements.
Gold recovers above $2,660, awaits Fed rate decision
Gold recovers slightly following Wednesday's sharp decline and trades above $2,660. The benchmark 10-year US Treasury bond yield struggles to push higher after Trump-inspired upsurge, allowing XAU/USD to hold its ground ahead of the Fed policy decisions.
Federal Reserve expected to deliver 25 bps interest-rate cut, shrugging off Trump victory
The Federal Reserve is widely expected to lower the policy rate after Donald Trump won the US presidential election. Fed Chairman Powell’s remarks could provide important clues about the rate outlook.
Outlook for the markets under Trump 2.0
On November 5, the United States held presidential elections. Republican and former president Donald Trump won the elections surprisingly clearly. The Electoral College, which in fact elects the president, will meet on December 17, while the inauguration is scheduled for January 20, 2025.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.