- USD/MXN receives support due to increased risk-off sentiment ahead of the ISM PMI release on Thursday.
- The US Dollar advances as Treasury yields rebound from multi-month lows.
- The Mexican Peso may struggle as a slowing economy reinforces the dovish sentiment surrounding the Banxico.
USD/MXN retraces its recent losses from the previous session, trading around 18.70 during the early European hours on Thursday. The US Dollar (USD) receives support from a correction in Treasury yields, underpinning the USD/MXN pair.
However, this upside of the USD/MXN pair could be limited due to the dovish sentiment surrounding the Federal Reserve’s (Fed) policy trajectory. Fed decided to keep rates unchanged in the 5.25%-5.50% range at its July meeting on Wednesday.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, trades around 104.10 with 2-year and 10-year yields on US Treasury bonds standing at 4.28% and 4.05%, respectively, at the time of writing.
During a press conference post-interest rate decision, Federal Reserve Chair Jerome Powell stated that a rate cut in September is "on the table," while the Federal Open Market Committee (FOMC) did not want to commit to anything in the statement. Powell added that the central bank will closely monitor the labor market and remain vigilant for signs of a potential sharp downturn, per Reuters.
The Mexican Peso (MXN) weakened as concerns over a slowing economy fueled speculation about a more dovish stance from the Bank of Mexico (Banxico). Recent data showed that Mexico's Gross Domestic Product (GDP) grew by just 0.2% in the second quarter ending in June, down from the 0.3% growth recorded in the previous quarter.
Additionally, the Fiscal Balance showed a deficit of 166.74 billion Pesos in June, a decrease from the previous deficit of 174.89 billion Pesos.
Traders anticipate further direction from upcoming US economic data, including the ISM Manufacturing PMI and weekly Initial Jobless Claims, both set to be released later on Thursday. Meanwhile, Mexico's Jobless Rate data will be announced on Friday.
Mexican Peso FAQs
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.
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.
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.
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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