- USD/MXN extends winning streak despite the dovish sentiment surrounding the Fed.
- The upside of the US Dollar could be limited due to declining US Treasury yields.
- The MXN may limit its downside as mid-month inflation data for July could deter Banxico from easing policy.
USD/MXN continues to gain ground for the fifth successive session, trading around 18.50 during the European hours on Monday. The USD/MXN pair gained ground as the US Dollar has recovered its intraday losses. However, the downside in the US Treasury yields may weaken the Greenback, limiting the upside of the pair.
US Dollar Index (DXY), which measures the value of the US Dollar against the six other major currencies, holds minor gains around the level of 104.40 with yields on US Treasury bonds standing at 4.37% and 4.17%, respectively, at the time of writing.
Additionally, signs of cooling inflation and easing labor market conditions in the United States (US) have fueled expectations of three rate cuts this year by the Federal Reserve (Fed), starting in September. This has put pressure on the US Dollar.
On Friday, the US Personal Consumption Expenditures (PCE) Price Index indicated a modest rise in inflation for June and provided further signs of easing price pressures. The US PCE Price Index rose by 2.5% year-over-year in June, down slightly from 2.6% in May, meeting market expectations. The PCE Price Index increased by 0.1% month-over-month after being unchanged in May.
In Mexico, mid-month inflation data for July could dissuade the Bank of Mexico (Banxico) from easing policy due to the risks of second-round effects, which Goldman Sachs economists suggest could extend to core inflation components.
Additionally, analysts at Citi Research now estimate that annual inflation will end at 4.30%, up from the previous forecast of 4.20%, with core inflation expected to finish 2024 at 4.0%. Mexico's economic growth is projected to slow, with an anticipated growth rate of 1.9%, down from 2.0% in the previous poll.
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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