Mexican Peso extends recovery after risk appetite returns

• The Mexican Peso is edging higher in key pairs, extending its three-day rally. 
• Fears the US economy is entering a recession caused market turmoil last week, but these are subsiding, helping MXN. 
• From a technical perspective, USD/MXN is correcting within a broadly uptrending market. 

The Mexican Peso (MXN) makes marginal gains against key counterparts at the start of the new trading week amid the return of the risk appetite in the market. 

Asian markets rose after being handed the baton from Wall Street’s rebound on Friday. The recovery stops the dramatic sell-off last week, sparked by fears of a recession in the US. These fears appear to be ebbing – a factor that is supporting the Peso. 

At the time of writing, one US Dollar (USD) buys 18.81 Mexican Pesos, EUR/MXN trades at 20.54, and GBP/MXN at 24.00.

Mexican Peso recovers after market turmoil subsides

The Mexican Peso edges higher after posting three up days in a row in its most heavily traded pairs. 

MXN is sensitive to market volatility and its recent recovery comes after fears of a US recession dissipated and investors regained their appetite for risk. 

The most recent significant event for the Peso was the Banxico meeting last Thursday. This saw the central bank reducing its key interest rate by 0.25% to 10.75% in response to core inflation in Mexico declining from 4.05% to 4.00% in July. This contrasts with rising headline inflation – from 5.10% to 5.57% – although factors driving up the broader gauge are considered temporary. 

The move had a negative effect on the Mexican Peso that ran counter to expectations. Usually, lower interest rates are negative for a currency as they reduce its attractiveness to foreign investors as a place to park capital, however, on this occasion the opposite was the case. The rate cut also came as a surprise to market participants.

That said, analysts believe demand for the Mexican Peso may be declining overall due to reduced carry-trade flows. The MXN has benefited from demand from carry traders using Yen-funded loans to purchase Pesos because of the high interest rates offered in Mexico. However, this could be less of a factor going forward. 

“We doubt the exuberance over the Yen-funded carry trade will resume any time soon and lead the Peso to revisit its highs reached earlier this year,” says Giulia Bellicoso, Assistant Economist at Capital Economics. 

In addition, Bellicoso adds that the Peso is now also “closer to what we think its fair value is.”  

Technical Analysis: USD/MXN corrects uptrend

USD/MXN is falling within an upward channel on the 4-hour chart, suggesting it is in a corrective short-term down move within a longer-term uptrend. 

USD/MXN 4-hour Chart 

The decline is probably a correction of the broader bullish trend, which will eventually peter out before a recovery. 

A break below Friday’s low of 18.77 would confirm more downside towards a target at 18.44 (August 1 low), followed by 18.35 and the 200-period Simple Moving Average (SMA). The lower channel line will likely provide solid support at roughly 18.30, too. 

The Relative Strength Index (RSI) is nearing oversold but still above, further suggesting more declines are possible before the down move becomes overextended.