Mexican Peso edges higher as market turns risk-on

• The Mexican Peso recovers marginally as the market turns risk-on, benefiting emerging market FX. 
• A possible revival of carry trade inflows amid a weaker Japanese Yen and reduced domestic political risk are further factors supporting the Peso.  
• USD/MXN is in the midst of unfolding a bullish ‘abc’ pattern move. 

The Mexican Peso (MXN) edges higher on Tuesday, rising by about a quarter of a percent across its most-heavily traded pairs. Positive risk appetite during the US sessions on Monday, which led to further gains for the S&P 500 stock index, may have been a factor supporting the Peso since this tends to benefit emerging market currencies. 

A revival of carry trade inflows might be a further factor providing support for the Mexican Peso. This involves traders borrowing in a currency with low interest rates such as the Japanese Yen (JPY) and purchasing a currency with high interest rates such as the Mexican Peso. The difference between the interest earned on the Peso investment and that paid on the Yen loan represents the profit discounting fluctuations in the exchange rate. 

The outlook for the Japanese Yen (JPY) is not looking bright after the weekend elections saw the ruling Liberal Democratic Party (LDP) coalition lose its grip on power. Opposition parties are generally against raising interest rates in Japan, which is weighing on the Yen and making the carry trade more attractive. Overnight, Yuichiro Tamaki, leader of the Japan Democratic Party for the People (DPP), said he was opposed to further rate hikes by the Bank of Japan (BoJ).

Mexican Peso impacted by political risk

The Mexican Peso may also be finding support after the news that the Mexican Supreme Court Judge, Juan Luis González Alcántara Carrancá, a staunch opponent of the controversial judicial reforms the Sheinbaum administration is trying to implement, attempted a new tactic to block their implementation. The reforms enable the election of judges rather than their appointment, but Carrancá, argued on Monday, that the creation of the “Evaluation Committees” used to short-list candidates for elections in the first step, was unconstitutional in itself, according to El Financiero. 

For context, the Peso depreciated over 10% in value after the June election in which Sheinbaum and her Morena party coalition gained a super majority in the Mexican Congress. Many western investors fretted over the consequences of the result since it would enable the new government to make radical reforms to the constitution, which critics viewed as market unfriendly.

On the data front, the Peso sees a busy week ahead, especially with Mexican preliminary Gross Domestic Product (GDP) data for Q3 and the Fiscal Balance out on Wednesday,  and the Jobless Rate on Friday. 

Recently, the International Monetary Fund (IMF) downgraded its forecasts for growth for the Mexican economy to 1.5% in 2024. GDP grew a robust 2.1% YoY in Q2, but corroboration of the IMF’s gloomy assessment from weak Q3 GDP data might weigh on the Peso.

Technical Analysis: USD/MXN unfolding leg higher

USD/MXN broadly continues unfolding a leg higher after a mild pullback. The up leg is probably the “c wave” of a bullish “abc” pattern, which began at the October 14 swing low. It will probably reach the Fibonacci 61.8% of the length of wave “a”, giving an upside target of 20.29. Such a move would gain confirmation from a break above the high of wave “b” at 20.09.

USD/MXN Daily Chart 

USD/MXN is probably in an uptrend on a short, medium and long-term basis and is trading in a rising channel. Given the technical dictum “the trend is your friend,” the odds favor a continuation higher.

In addition, the original break above 19.83 (October 1 high) has already confirmed a probable move up, with a target in the vicinity of the September 10 high at 20.13.