The Mexican Peso (MXN) advanced steadily in early trading on Friday against the US Dollar (USD) following the latest revision on inflation figures in the United States (US). The data confirms the Federal Reserve’s (Fed) attempt to curb elevated prices is working, opening the door to lower interest rates. Therefore, the Greenback (USD) is trading softer, and the USD/MXN exchanges hands at 17.10, down 0.25%.
Mexico’s economic docket during the last two days has been busy. Inflation is heading up, while the Bank of Mexico (Banxico) decided to hold rates at 11.25%, though it removed hawkish language from the monetary policy statement. Instead, they added, “In the next monetary policy meetings, it will assess, depending on available information, the possibility of adjusting the reference rate.”
The USD/MXN is neutral to downwardly biased after clashing with the 50-day Simple Moving Average (SMA) at 17.12 with buyers unable to decisively break that level. Since then, the exotic pair has resumed its downtrend, though it could remain at around the 17.05/17.17 range. Further downside lies ahead as the Relative Strength Index (RSI) shows bears are gathering momentum with the slope peaking two days ago before extending its downtrend. The next support levels lie at 17.05, the psychological 17.00 figure and last year’s low of 16.62.
On the other hand, if buyers reclaim the 50-day SMA, that can pave the way to test the 200-day SMA at 17.31. Upside risks emerge once that barrier is cleared. The next real resistance comes at 17.41, the 100-day SMA.
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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