Mexican Peso (MXN) prolongs its gains against a softer US Dollar (USD) as North American traders get back from Thanksgiving for a shortened session, though they failed to boost the latter. Treasury bond yields in the United States (US) rose while interest rate cuts odds by the US Federal Reserve (Fed) were pushed back. Meanwhile, Mexico’s economy grew as expected, a headwind for the USD/MXN, trading with losses of more than 0.50%.
The National Statistics Agency (INEGI) revealed the Gross Domestic Product (GDP) rose as expected on an annual basis and exceeded forecasts in a 90-day period. That could prevent Bank of Mexico (Banxico) officials from adopting a dovish stance after the minutes showed policymakers estimated a rate cut in the first quarter of 2024.
On the US front, business activity showed signs that it remains improving, according to the S&P Composite and Services PMI. The outlier was Manufacturing, which dropped into recessionary territory.
The USD/MXN pair was undermined by upbeat economic data, which pushed the pair below the 17.10 mark, reaching a three-day low of 17.08. The bias remains downward, and the pair could extend its losses if it breaches the November 21 swing low of 17.06. If that level is surrendered, a test of 17.00 is on the cards.
On the other hand, if buyers reclaim 17.20, that could facilitate a jump to the 100-day Simple Moving Average (SMA) at 17.34. Once buyers regain that supply zone, further upside could be witnessed at the 20-day SMA at 17.46.
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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