Mexican Peso hurt by Banxico's Deputy Mejia's dovish stance

Mexican Peso drops more than 1% after Trump assassination attempt news shakes markets.
US Dollar Index climbs to 104.18, reflecting increased demand for safe-haven assets.
Banxico's interest rate discussions in focus as political developments heighten market volatility.

The Mexican Peso begins the week on the back foot, losing more than 1% in early trading on Monday amid risk aversion following an assassination attempt on former US President Donald Trump during a rally in Pennsylvania. Therefore, the USD/MXN advances steadily and trades at 17.80 after bouncing off last week’s lows of 17.60.

Over the weekend, political developments in the United States (US) grabbed the headlines. After Trump’s attack, his odds of getting back to the White House increased, spurring flows to safety and underpinning the Greenback. The US Dollar Index (DXY), which tracks the buck's performance against the other six currencies, rose 0.10% to 104.18.

Mexico’s economic docket will be absent during the week, resuming on July 22, when the National Statistics Agency (INEGI) reveals growth figures for the month of May. Nevertheless, Bank of Mexico (Banxico) policymakers and political developments could rock the boat.

Banxico’s Deputy Governor Omar Mejia Castelazo's recent comments on interest rates have sparked significant interest in the financial markets. Mejia, who was the sole dissenter in Banxico’s June 27 monetary policy decision, advocating for a quarter of a percentage rate cut, emphasized the need for any rate adjustments to be gradual and not continuous.

Mejia added that further easing would not imply the beginning of a cycle of interest rate cuts.

Last week’s data witnessed Mexico’s Industrial Production resilience, recovering in May following April’s plunge in monthly figures. Meanwhile, the latest Bank of Mexico (Banxico) minutes revealed that the disinflation process has evolved, which may spark discussions to adjust interest rates at upcoming meetings.

Daily digest market movers: Mexican Peso hurt by Banxico’s comments, risk-aversion

Banxico board members project growth to be lower than expected, as Mexico’s economic activity has been weak since the end of 2023. Most policymakers mentioned that inflation will converge toward the target in the last quarter 2025.
They added that services inflation does not show a clear downward trend, which was one of the reasons for keeping rates unchanged at the June meeting.
Mexico’s June inflation figures were higher than expected due to a rise in food prices when most economists expect Banxico to resume lowering interest rates.
June consumer inflation figures were lower than expected in the United States, increasing the chances that the Federal Reserve would lower borrowing costs in 2024 by at least 54 basis points, according to the December 2024 fed funds rate futures contract.
According to the CME FedWatch Tool data, the odds for a September cut are 98%, up from 95% on Friday.

Technical analysis: Mexican Peso slides as USD/MXN climbs above 17.80

The USD/MXN made a U-turn on Monday and rose above last Friday’s high of 17.80, which opened the door to challenging the 17.90 figure. However, buyers had fallen shy, hitting a peak at 17.95. Momentum remains bullish despite the fact that the exotic pair printed a leg-up, though short-term has shifted upwards.

If USD/MXN continued to aim up, the next resistance would be the June 24 low turned resistance at 17.87, followed by the 18.00 figure. Further upside potential is seen above the July 5 high at 18.19, followed by the June 28 high of 18.59, allowing buyers to aim for the YTD high of 18.99.

Conversely, if USD/MXN slumps below 17.60, the next support would be the confluence of the December 5 high and the 50-day Simple Moving Average (SMA) near 17.56/60, followed by the 200-day SMA at 17.28. Further losses would test the 100-day SMA at 17.20.

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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