Mexican Peso rises in line with other risk assets

• The Mexican Peso is rising as risk assets rebound on a more upbeat market mood. 
• Strong US data has reduced the chances of a hard landing for the US economy. 
• USD/MXN continues to make higher highs in line with the dominant uptrend.  

The Mexican Peso (MXN) edges higher in its most-traded pairs on Friday as market sentiment improves following the release of stronger-than-expected US data indicating a hard landing for the US economy is now less likely. The generally upbeat sentiment, in turn, benefits the risk-on MXN. 

The overall trend for the Peso of the last weeks, however, has been bearish as slowing economic growth, political factors and expectations the Bank of Mexico (Banxico) will continue with its easing cycle, all weigh. 

At the time of writing, one US Dollar (USD) buys 19.76 Mexican Pesos, EUR/MXN trades at 21.90, and GBP/MXN at 26.05.

Mexican Peso tracks riskier assets higher

The Mexican Peso edges higher on Friday, tracking riskier assets in general after the release of US annualized Gross Domestic Product (GDP) for the second quarter was revised up to 3.0% growth compared to the preliminary estimate’s 2.8%, in data released Thursday. 

Spirits were further lifted after US Initial Jobless Claims data came out slightly lower than expected at 231K, when 232K had been forecast. This was also below the upwardly-revised 233K of the previous week. Given the Fed’s new focus on “the risks to employment,” this helped instill more confidence the economy might manage to achieve a soft landing. 

That said, the Mexican Peso still faces domestic headwinds. The Bank of Mexico (Banxico) quarterly report for Q2, released on Wednesday, revealed a downward revision to the bank’s GDP forecasts for 2024 and 2025. Banxico now expects growth to slow to 1.5% in 2024, down from 2.4% in the previous report. In 2025, it expects the economy to grow by 1.2% from 1.5% previously anticipated. These revisions indicate Banxico will feel more pressure to lower interest rates to support growth. 

On the subject of adjusting interest rates, the report stated: “Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments.”

Banxico did not change its inflation forecasts from those announced in its August policy meeting, but said it had included new factors such as the (inflationary) impact of a weaker Peso. It continues to see inflation falling steadily towards the bank’s 3.0% target, which it expects to hit in the last quarter of 2025. It mentioned the course of services sector inflation as a key factor in its decision making. 

Most analysts foresee Banxico making substantial rate cuts before the end of the year.  

• Banorte expects a 25 basis point (bps) rate cut in September and interest rates to end the year at 10.25% (rates are at 10.75% currently). 
   
• Citibanamex expects a quarter of percentage rate cuts in September, November, and December, with Banxico’s reference rate hitting 10.00% by year-end.
   
• Monex expects the bank’s reference rate to end the year at 10.25% with a cut in September, and November and December meetings “live”.
   
• Goldman Sachs anticipates rate cuts of 25 bps each in the three remaining meetings of the year, bringing the interest rate down to 10.00% by year’s end.
   
• Capital Economics foresees 50 bps of cuts before the end of 2024, bringing the reference rate down to 10.25%. 

Political risks are a further bearish background factor for the Peso. The government’s proposed reform of the judicial system has elicited criticism from members of the judiciary themselves – with protests in Mexico City – foreign diplomats and investors alike. 

The Mexican government chose to “pause” diplomatic relations with the US after the US ambassador publicly criticized the reforms, and Canada has also broken diplomatic ties. If the stand-off escalates, there is a chance it could negatively impact free trade between the three countries, with negative implications for the Mexican Peso. 

At the same time, the Peso potentially stands to benefit from an escalating trade war between North America and China. Given its role as an intermediary manufacturer for Chinese goods entering North America, the escalation of tariffs – most recently by Canada – could find it well positioned to benefit from the fallout.   

Technical Analysis: USD/MXN makes higher highs

USD/MXN trades steadily higher within a broader rising channel. It has established an uptrend and given “the trend is your friend” the odds favor longs over shorts. 

USD/MXN 4-hour Chart 

The pair made a higher high of 19.95 on Thursday, from which it is currently pulling back. Once the correction has finished, however, it will probably resume its uptrend towards a target at the upper channel line in the 20.60s.  

That said, the Relative Strength Index (RSI) is making lower highs at the same time as price is making higher highs – a sign of bearish divergence. This suggests an underlying lack of bullish strength in the rally, which could be a warning signal of deeper downside corrections to come.