Mexican Peso halts rally despite upbeat market sentiment, soft US Dollar

21 Nov 2023, 23:52 · Views 77

Mexican Peso (MXN) has paused its seven-day rally against the US Dollar (USD), with the USD/MXN pair having seen a slight uptick on Tuesday.
Mexico's economic calendar remains relatively quiet, with upcoming mid-November inflation report relevant to Banxico's future monetary policy decisions.
USD/MXN traders await the latest Federal Reserve (Fed) meeting minutes.

Mexican Peso (MXN) loses some ground against the US Dollar (USD) in early trading during Tuesday’s North American session, despite overall US Dollar weakness, mostly against G8 currencies in the Forex space. The Peso’s seven-day rally halted after refreshing a two-month high of 17.06, but the USD/MXN has reversed its downtrend and climbed 0.47%, trading at 17.18.

Mexico’s economic calendar remains light, with USD/MXN traders eyeing economic data that could weigh on the Bank of Mexico (Banxico) futures decisions, regarding monetary policy. On Wednesday, Mexican Retail Sales are expected to show an improvement, and on Thursday, the November mid-month inflation report most likely witnessed a jump in headline inflation, in contrast to the core, expected to dip further toward the 5% threshold.

Meanwhile, the USD/MXN pair remains driven by economic data from the United States (US) and market mood. The latest data revealed that US Existing Home Sales dropped the most since November 2022. The US Federal Reserve (Fed) will reveal the latest meeting minutes at 19:00 GMT.

Daily digest movers: Mexican Peso retreats despite a weaker US Dollar, USD/MXN challenges 17.20

The USD/MXN pair is trading well below the 20, 50, 100, and 200-day Simple Moving Averages (SMAs), portraying a bearish bias.
The US Dollar Index (DXY), which measures the Greenback’s value against a basket of peers, posts losses of more than 0.15%, trading at 103.28.
The US 10-year Treasury bond yield tumbles two basis points (bps) to 4.39%.
US Existing Home Sales plunged 4.1% from 3.95 million to 3.79 million, missing estimates of 3.9 million in October.
Mexico’s Gross Domestic Product (GDP) figures will be revealed on Friday, alongside the third quarter current account.
Data published last week showed prices paid by consumers and producers in the US dipped, increasing investors' speculations that the Fed’s tightening cycle has ended.
The swap market suggests traders expect 100 basis points of rate cuts by the Fed in 2024.
The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso loses a step as USD/MXN exchanges hands above 17.15

The USD/MXN bearish bias remains intact, but Tuesday’s price action is forming a ‘bullish engulfing’ candlestick pattern, which suggests the pair could shift upwards in the near term. If the pair breaks above 17.28, that could pave the way for a test of the 100-day Simple Moving Average (SMA) At 17.34. Once cleared, that could open the door to challenge the confluence of the 20 and 200-day SMAs at around 17.61.

On the flip side, if USD/MXN sellers keep the spot price below 17.28, they would remain in charge but must drag prices below 17.00 to cement the downward bias on its way toward the year-to-date (YTD) low of 16.62.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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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