Market news
03.06.2024, 08:10

Mexican Peso weakens after news of Sheinbaum victory

  • The Mexican Peso weakens after the news that Claudia Sheinbaum has won the Mexican presidential election. 
  • Sheinbaum is likely to be more “disciplined” than her predecessor but continue his generous welfare programmes, say analysts.  
  • Her plans to raise the minimum wage are likely to drive growth and consumer spending but could increase inflation, economists say.
     

The Mexican Peso (MXN) edges lower in its key pairs on Monday after the news that Claudia Sheinbaum is set to win the Mexican presidential election with a comfortable majority. Sheinbaum is expected to continue the legacy of her predecessor, mentor and fellow Morena party colleague, Andrés Manuel López Obrador. 

Asian stock markets have mostly had a positive session, maintaining the good mood of the US markets at the end of last week. Chinese Caixin Manufacturing PMI data for May released on Monday beat expectations, showing further expansion in the sector. Despite MXN falling, a positive market mood is generally supportive of the Mexican Peso.

USD/MXN is exchanging hands at 17.05 at the time of writing, EUR/MXN is trading at 18.51 and GBP/MXN at 21.71. 

Mexican Peso weakness after Sheinbaum wins presidential election

The Mexican election was held on Sunday, and a quick count by the National Electoral Institute shows Sheinbaum leading with 58.3%-60.7% of the vote – an unassailable lead, according to Associated Press (AP) News. 

Andrés Manuel López Obrador, the current incumbent, posted a video on X on Monday morning congratulating Sheinbaum on winning, saying today is “a day of glory” for all the people of Mexico, according to Aljazeera News. Sheinbaum will be the first female president to be elected in the country.  

Whilst on the campaign trail, Sheinbaum often repeated she will continue with most of Obrador’s social policies, including his generous welfare programme. She has also pledged to increase the minimum wage by circa 11%. According to economists, this is likely to boost consumer spending, a key driver of growth in recent quarters. 

From a monetary perspective, however, it could make it difficult for the Banco de México (Banxico) to bring down inflation, says Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics. 

Greater discipline 

Analysts say that Sheibaum may bring more order and discipline to the office than Obrador, because of her more quantitative and scientific background. 

“She describes herself as someone who loves data, who makes decisions and implements policies based on data and that’s certainly in contrast to Lopez Obrador. She is someone who has an environmental science and engineering background. She has spoken about the need for Mexico to lead more in multilateral spaces on the climate emergency. She’s someone who, despite endorsing militarisation, did strengthen and take action on the civilian police in Mexico City as mayor here. So there’s reason to think that there could be some differences, but the jury is still out,” according to Stephanie Brewer, director for Mexico at the Washington Office of Latin America (WOLA).

Mexican Peso slowed its decline after US core PCE miss

The Mexican Peso stopped leaking lower against the US Dollar (USD) on Friday after US core Personal Consumption Expenditures (PCE) data for April missed expectations on a monthly basis, coming out at 0.2% rather than the 0.3% forecast. 

PCE is the Federal Reserve’s preferred gauge of inflation so it tends to have an outsized impact on interest-rate expectations and USD pairs – the data weighed on the USD/MXN.  

Technical Analysis: USD/MXN forms triangle within uptrend

USD/MXN – or the number of Pesos that can be bought with one US Dollar – forms a triangle price pattern within a short-term uptrend. It is unclear whether the triangle is symmetrical or right-angled, and so it is slightly biased to break out higher in line with the dominant short-term uptrend, rather than lower, as would be the case if it were clearly of the right-angled variety. 

Overall, given that “the trend is your friend”, the odds favor a continuation higher in the short-term. 

USD/MXN 4-hour Chart 


 

USD/MXN could rise up to a major trendline (black) situated at around 17.25. A break above the May 30 high at 17.13 would probably confirm an extension towards the trendline target. 

The medium and long-term trends remain bearish, however, raising the prospect of a reversal lower once the short-term uptrend runs out of steam. However, there are no signs of this happening yet, so the uptrend is likely to continue. A decisive break above the major trendline would solidify the bullish case and indicate a bullish reversal in the medium-term time frame as well.

A decisive break would be one accompanied by a long green bar that closed near its high or three consecutive green bars in a row.

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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