Mexican Peso extends downtrend as multiple risks weigh

  • The Mexican Peso extends its weakness into a fourth day as multiple risks lead traders to press “sell”. 
  • Trump Tariff threats, a critical IMF report, political risks and weak data all combine to weigh on the Mexican currency. 
  • USD/MXN extends its rally from the base of a major rising channel as technical indicators point north.

The Mexican Peso (MXN) seems to be rinsing and repeating the depreciation of the past few days on Thursday as market bears – now more confident in the persistence of the evolving downtrend – push the Peso lower in all its key pairs. 

A cocktail of ingredients is contributing to the Peso’s shakedown, including former president Donald Trump’s threat to slam Mexican auto imports with tariffs of up to 300%, an International Monetary Fund (IMF) report that highlighted a slowdown in economic activity; political risk, and a deterioration of Consumer Confidence data for September. 

Mexican Peso cracks as Donald thumps imports piñata

The Mexican Peso declined on average 1.5% on Tuesday, after Donald Trump said in an interview with Bloomberg News that “Mexico is a tremendous challenge for us.” He went on to explain how China was building mega car-manufacturing plants on the US-Mexico border, from where it was flooding the US market and hounding out US competitors.  

Trump vowed to stop the practice by reinstating high tariffs and so enable a regeneration of the US auto industry. Given the significance of the automotive industry to the Mexican economy, as well as the demand for Peso’s generated by exports to the US, the former president’s comments weighed on MXN.. 

Mexican Peso undermined by IMF report 

The Mexican Peso saw further weakness after the IMF published a report on Tuesday in which it forecast Gross Domestic Product (GDP) growth slowing to 1.5% at the end of 2024. This comes after the most recent GDP data showed the economy grew 2.1% in Q2. It is also below the Bank of Mexico’s own 2.1% forecast for 2024, although it is slightly higher than the average of the responses in the Banxico’s September survey of private-sector analysts of 1.45%. 

The main reasons for the slowdown were given as “binding capacity constraints and a tight monetary policy stance” as well as weaker-than-expected growth in the US and the “unforeseen effects from recent institutional reforms”, according to the report. The latter refers to the controversial judicial reform, which has spooked markets.

In regards to headline inflation, the IMF saw this falling to the Bank of Mexico’s (Banxico) 3.0% target in 2025, in line with the central bank’s own forecasts but below the Banxico survey average forecast of 3.86% (3.80% median). 

Banxico set to cut and cut rates again before year-end

Further downwards pressure on the Peso comes from expectations of lower interest rates, which reduce foreign capital inflows. The central bank is expected to cut the prime interest rate by 50 basis points (bps) (0.50%) before the end of 2024, bringing it down to 10.00% from 10.50%. 

This is reflected in Banxico’s survey mean forecasts, which show respondents project a fall in the bank rate to an average of 10.04% by the end of 2024 (10.00% median) and 8.09% by the end of 2025 (8.00% median). 

Technical Analysis: USD/MXN extends recovery from base of rising channel

USD/MXN extends its recovery from support provided by the base of a rising channel as well as the (red) 50-day Simple Moving Average (SMA) nearby. 

USD/MXN Daily Chart 

USD/MXN is now probably in a short-term uptrend, which given the technical analysis principle that “the trend is your friend,” is biased to continue.

The break above the 19.83 (October 1 high) target will now probably lead to a move up to between 20.10-20.15 and the vicinity of the September 10 high at 20.13.  

The Moving Average Convergence Divergence (MACD) (blue) line is rising sharply and has broken above its (red) signal line, further indicating a bullish bias.

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.

 

Source: https://www.fxstreet.com/news/mexican-peso-extends-downtrend-as-multiple-risks-weigh-202410170912