- The Mexican Peso takes a break after a string of days in which the currency has seen losses.
- As an emerging market currency it remains sensitive to risk sentiment which has dipped in recent sessions.
- USD/MXN pulls back from the key 20.00 level although the short-term trend remains bullish.
The Mexican Peso (MXN) pauses on Tuesday after a multiple-day run of weakness in its key pairs. Emerging market (EM) assets had been hit by a general unwinding of risk appetite triggered by a recalibration of global interest rate expectations. This has generally hit risk-sensitive EM currencies like the Peso at the worst. The trend started after United States (US) investors changed their expectations about the trajectory of interest rates in the US, seeing them not falling as sharply due to unexpectedly strong US economic data.
Further pressure on the Mexican Peso comes from former US President Donald Trump’s improved performance in opinion polls. This now means the race to the White House is neck-and-neck between him and US Vice President and Democratic candidate Kamala Harris. Trump has threatened to tear up the US’s free trade agreement with Mexico and whack up to 300% tariffs on Mexican cars imported into the States. Such a move would hit the Mexican economy and reduce demand for its currency.
The latest poll by TIPP Insights on October 18-20 shows Donald Trump in the lead with 48% of the vote to Kamala Harris’s 47%, according to election website FiveThirtyEight. Betting website OddsChecker, meanwhile, gives Trump an 8/13 or 61.9% chance of winning over Harris’s 8/5 or 38.50%.
Mexican Peso under pressure from cautious investor sentiment
The Mexican Peso is facing challenges due to a growing cautious stance among global investors towards emerging market assets, as noted in an article from El Financiero. This sentiment stems partly from rising concerns that the Federal Reserve (Fed) may have prematurely lowered US interest rates by a substantial 50 basis points (bps) at its September meeting.
Strong US economic data indicates that such a significant rate cut may not have been justified. While a robust US economy generally benefits Mexico due to their close trading relationship, high US interest rates make EM assets — especially from Brazil and Mexico — less attractive, as highlighted by The Wall Street Journal (WSJ). A shift back to a tighter monetary policy could dampen global investor interest in Mexican assets.
Additionally, disappointment over the limited scope of recent Chinese stimulus measures may be contributing to heightened investor caution regarding EM holdings, further impacting the Peso. However, it’s worth noting that the People’s Bank of China (PBoC) announced cuts to its one- and five-year prime rates to ease credit conditions on Monday.
On the data front, Tuesday sees the release of Mexican Economic Activity data for October at 12:00 GMT, forecasted to increase by 0.9% year-over-year after a 3.8% rise in September. If activity beats expectations, it could help the Peso and vice versa if the opposite.
Technical Analysis: USD/MXN repulsed by 20.00 barrier
USD/MXN flirts with the key 20.00 barrier and then pulls back. It will probably resume going higher once the correction ends. The pair is in a short, medium and long-term trend, which, given the principle in technical analysis that “the trend is your friend,” is more likely than not to extend.
USD/MXN Daily 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 blue line of the Moving Average Convergence Divergence (MACD) momentum indicator is rising quite strongly after bottoming out at the zero line and crossing above its red signal line, supporting a mildly bullish outlook overall.
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-pauses-on-tuesday-after-run-of-down-days-202410220942