Mexican Peso edges lower after Mexican Retail Sales misses forecasts

The Mexican Peso depreciates after the release of lower-than-expected Retail Sales data.
This backs up the latest IMF report which suggests weak growth in the third and fourth quarter.
USD/MXN nudges back above the key 20.00 hurdle and remains in a broader uptrend overall.

The Mexican Peso (MXN) weakens in its key pairs on Wednesday after the release of lower-than-expected Mexican Retail Sales data puts pressure on the Peso.

Retail Sales fell 0.8% in August, from a revised-down 0.6% decline and was below the negative 0.4% forecast. Month-on-month the data showed a 0.1% rise against the 0.7% in July and below the 0.2% expected, according to INEGI. The data reinforced lower growth estimates from the International Monetary Fund (IMF) that strongly suggests weak growth in the second half of 2024.

Other factors impacting the MXN include uncertainty over the outcome of the US election on November 5 (a Trump win would be negative for the Peso) and the general hit to emerging market assets due to the global sell-off in bonds amid a smoother downward trajectory for US interest rates.

Mexican Peso vulnerable if IMF forecasts hold true

The Mexican Peso is depreciating after weak Retail Sales data backs up the IMF's lower estimates in tis October World Economic Outlook report eleased on Tuesday. In the report the IMF maintained its 1.5% Gross Domestic Product (GDP) growth forecast for Mexico in 2024.

The forecast is well below Q2 GDP data, which showed a 2.1% rise in annualized growth in the quarter but is equal to Q1’s 1.5%. It would suggest that the next two quarters of growth in Mexico are likely to be substantially lower.

Further, in 2025, the IMF expects Mexico to grow by only 1.3%, which is well below the Bank of Mexico’s (Banxico) 3.0% target. In 2026, the IMF expects growth of 2.1%.

If the IMF forecasts are accurate, the lower growth will probably lead to a sharper disinflationary trend and encourage Banxico to cut interest rates more aggressively. Economists are already factoring in a 50 basis points (bps) (0.50%) of cuts by the end of 2024, bringing the bank’s main interest rate down to 10.00%. This, in turn, is likely to put downward pressure on the Peso, since lower interest rates attract less foreign capital inflows.

Mexican Economic Activity data out on Tuesday gave investors a taste of what is to come after falling well below estimates. On a month-over-month basis, activity sank 0.3% in August, down from 0.6% in July and below the estimated decline of 0.1%. On an annual basis, Economic Activity expanded by 0.4%, beneath forecasts of 0.7%, and down from July’s 3.8% growth.

Technical Analysis: USD/MXN remains range-bound within an uptrend

USD/MXN trades around the 20.00 handle on Wednesday. The pair is in a medium and long-term uptrend which suggests the odds favor long-holders.

USD/MXN 4-hour Chart

The break above 19.83 (October 1 high) has confirmed a probable move up to the next target in the vicinity of the September 10 high at 20.13.

The Relative Strength Index (RSI) momentum indicator is diverging bearishly with price compared to the peak on October 21 when RSI was higher but price was not. This suggests underlying weakness could limit upside and increases the risks that the pair could pull back down.

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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