Mexican Peso strengthens as market mood turns positive

The Mexican Peso is rising in line with upbeat sentiment on Thursday.
The move comes after the Peso made gains on Wednesday despite the passing of controversial judiciary reforms in Mexico.
USD/MXN breaks down from its rising bullish channel, indicating potentially more weakness on the horizon.

The Mexican Peso (MXN) continues rising in its most heavily traded pairs on Thursday, building on the 1.4% to 1.7% gains of the previous day.

Market sentiment is strong, with Asian equities making gains overnight, the Old Continent’s stock indexes rising at the start of the European session, and commodities recovering across the board. Overall, the positive market mood supports the risk-sensitive Peso.

Mexican Peso shrugs off Senate vote

The Mexican Peso rose on Wednesday despite passing a controversial judicial reform bill through the Senate. Several large-name investors, including Morgan Stanley, Julius Bear, and rating agency Moody’s, have warned the reforms could undermine the independence of the judiciary, harming both foreign direct investment and the country’s economic prospects.

In June, the Peso depreciated by over 10%, and Mexican bourses saw similar losses following the news that the ruling Morena-led coalition won a super-majority in Mexico’s general election. The victory enabled them to pass a set of controversial reforms, including the judicial reforms passed in the Senate on Wednesday, which require amendments to the country’s constitution. However, the eventual voting through of the bill did not cause any additional weakness to the Peso on the day.

MXN actually bucked the FX-market trend on Wednesday by gaining over 1.4% against the US Dollar (USD). This contrasted with most other currencies, which weakened against the Greenback following the release of higher-than-expected core US inflation data. USD rose because the data lessened the chances of the Federal Reserve (Fed) making a larger-than-standard 50 basis points (bps) cut to interest rates at its September meeting.

Strong automobile sales data showing record car sales in Mexico could have been one factor in the Peso’s strength. Commercial car sales in the country are expected to hit a record 56,592 in 2024, according to a report from the Mexican Automotive Distributors Association (AMDA) on Wednesday. This is above the previous record of 53,300 sales set in 2007.

The data follows the announcement in August that Volvo is planning to build a $700 million heavy-duty truck manufacturing plant in the northern Mexican city of Monterrey. The company cited logistic efficiencies and the benefit of being able to sell vehicles across the region, including the US, as reasons for the move, according to Reuters.

The trend continues the nearshoring boom Mexico has enjoyed in recent years. “Mexico exported $593 billion worth of goods in 2023, with much of it transported over land using trucks or tractor-trailers. Cargo flows over the U.S.-Mexico border also made the countries each other's largest trading partners last year,” said the Reuters report.

At the time of writing, one US Dollar (USD) buys 19.75 Mexican Pesos, EUR/MXN trades at 21.75, and GBP/MXN at 25.76.

Technical Analysis: USD/MXN breaks out of rising channel

USD/MXN has broken out of an ascending mini-channel. The breakdown indicates more weakness probably on the horizon for the pair.

USD/MXN 4-hour Chart

According to technical analysis, the breakout from the channel activates a downside target at 19.62, the 0.618 Fibonacci (Fib) extension of the height of the channel extrapolated to the downside. More bearishness could even see prices fall to around the 19.50 mark, the 1.000 ratio Fib extension, and the key support level from the August 22 swing high.

However, the overall trend in the medium and long-term is bullish, and since, according to technical analysis theory, “the trend is your friend,” this favors more upside emerging eventually. As such, any weakness may be temporary before the pair rallies again.

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

(This story was corrected on September 12 at 09:45 GMT to add the USD/MXN 4-hour chart, instead of Gold's chart.)

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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