Mexican Peso: pace of downtrend slows
- The Mexican Peso extends its downtrend but appears to be finding a floor.
- The weakness of rivals, such as the US Dollar, as well as uncertainty over the direction of Mexico’s monetary policy are supportive factors.
- USD/MXN steadily rises in a mildly bullish channel.
The Mexican Peso (MXN) trades flattish and mixed on Monday after a week in which it lost between 1.3% and 1.6% in its most traded pairs, extending the downtrend – albeit at a slower pace – established since the April 2024 highs.
The Peso is depreciating on a combination of investor concerns over controversial new judicial reforms, uncertainty over the US presidential election and its impact on trade, and the unwinding of the carry trade – now less attractive since the Peso started trending lower.
Mexican Peso depreciates at slower pace
The Mexican Peso depreciated at a slower rate last week compared to previous weeks, both due to stubbornly high headline inflation in Mexico, which is making the Bank of Mexico (Banxico) cautious about making further cuts to interest rates, and the weakness of its counterparts, in particular the US Dollar.
Although Mexican core inflation is steadily falling back towards the Banxico’s 3.0% target after registering a 4.05% rise in core prices in July, headline inflation remains elevated and actually accelerated for the fifth month in a row to 5.57% in July from 4.98% previously.
Banxico cut interest rates by 0.25% to 10.75% at its August meeting but the vote was a close call as two of the Bank’s five-strong board – Jonathan Heath and Irene Espinosa – dissented due to continued concerns about elevated headline inflation.
In a speech on Thursday, Heath – one of the dissenters – said that there was “still no certainty” as to when food prices would cool, according to El Financiero. The rising cost of fruit is a key contributor to the elevated headline rate of inflation.
Although Heath added that Banxico expected food prices to fall, he added that there was no way of knowing “when and by how much”. Stubbornly high inflation in the services sector of the economy was another factor keeping overall inflation elevated, he added. Heath’s uncertainty suggests he may continue voting against easing policy in future meetings. If interest rates remain high in Mexico, it will be a supportive factor for the Peso, since higher interest rates attract greater capital inflows.
Mexican payrolls data shows slowdown in hiring
A further factor that could influence Banxico’s decisions on monetary policy are continued signs of a slowdown in the labor market. Mexican payrolls rose at their slowest pace in 40 months, increasing by only 58,047 in August, according to data from IMSS, which measures the number of new contributors to social security.
A combination of slowing economic growth, lower growth forecasts, employers delaying hiring because of uncertainty due to concerns around the government’s reforms to the judiciary and the outcome of the US presidential elections, were factors impacting the creation of new jobs, according to El Financiero.
Subdued employment in Mexico may encourage the Banxico to be bolder in cutting interest rates despite high inflation, which, in turn, could be a negative factor for the Peso.
At the time of writing, one US Dollar (USD) buys 19.94 Mexican Pesos, EUR/MXN trades at 22.08, and GBP/MXN at 26.14.
Technical Analysis: USD/MXN trades in a mildly bullish channel
USD/MXN has pulled back down from the new 2024 highs it touched at 20.15 on Thursday and is currently trading back inside a familiar range in the 19.90s.
The bearish Shooting Star Japanese candlestick the pair formed on Thursday failed to gain confirmation and follow-through lower. Instead, the pair continued a mildly bullish rising channel between the 20.15 high and lows in the mid 19.80s.
USD/MXN 4-hour Chart
The channel itself is unfolding within a broader rising channel that began from the April 2024 lows.
The overall trend remains bullish, and since according to technical analysis theory “the trend is your friend,” this favors more upside. As such, any weakness may be temporary before the pair rallies again.
A break above the top of the mini-channel and 20.15 high of the year, would provide added confirmation of a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
