Mexican Peso (MXN) is virtually unchanged against the US Dollar (USD) early during Monday’s North American session after USD/MXN hit a two-month low of 17.03. Nevertheless, the Greenback pared some losses, underpinning the USD/MXN, which trades at 17.13, up a decent 0.23% on the day.
Mexico’s economic calendar revealed a current surplus of $2.628 billion in October, equivalent to 0.6% of the Gross Domestic Product (GDP), the Bank of Mexico (Banxico) reported. In the meantime, Banxico’s Deputy Governor, Jonathan Heath, commented that core prices must come down more for inflation to keep easing. Heath added that a slowdown in the Core Consumer Price Index (CPI) could put into play a possible rate cut by February or March next year, he said in a radio interview at Imagen Radio.
The USD/MXN downtrend remains in place from a daily chart perspective, but Monday’s price action suggests a ‘double bottom’ chart pattern could be emerging. Further upside above the November 21 latest swing high at 17.26 would confirm the chart pattern, targeting a rally toward 17.50. On its way north, the 100-day Simple Moving Average (SMA) at 17.34 must be cleared, followed by the 20-day SMA at 17.41.
On the flip side, a decisive breach of the 17.05 figure could open the door to test the 17.00 figure, followed by the year-to-date (YTD) low of 16.62.
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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