- The Mexican Peso continues falling on Friday.
- Continued domestic woes and technical trading may be weighing on MXN.
- Technically, USD/MXN finds a firm bedrock of support at the base of a channel and recovers.
The Mexican Peso (MXN) is trading marginally down in its key pairs on Friday as the currency suffers from elevated political risk premia, a negative outlook for the domestic economy and as chart technicals favor short-positioning.
Mexican Peso depreciates amid political concerns
The Mexican Peso depreciated for the second day in a row in its most heavily traded pairs on Thursday as domestic headwinds continued to weigh on investor confidence. Reforms to the judiciary, the abolition of autonomous regulatory bodies and the perilous state of the public finances, including those of public-owned companies such as the Mexican state-owned Oil company Pemex, are all taking a toll.
The Bank of Mexico is widely expected to cut interest rates by 25 basis points (bps), from 10.75% to 10.50%, at its meeting on Thursday. Although this is less than the Fed’s 50 bps cut, the expectation of lower interest rates is still generally negative for a currency since it lessens foreign capital inflows.
The Peso lost the most ground against the Pound Sterling (GBP) and the Euro (EUR) on Thursday as both these currencies’ central banks are likely to take a more measured approach to cutting interest rates compared to the Fed.
In fact, the Bank of England (BoE), which had its meeting on Thursday, decided to keep interest rates unchanged amid still-high core inflation. For the Euro, wage inflation is expected to remain inflationary until the end of the year, preventing the European Central Bank (ECB) from slashing interest rates aggressively in the Eurozone.
Technical Analysis: USD/MXN extends recovery from base of channel
USD/MXN is finding technical support at the base of a long-term rising channel and recovering slowly.
Although the pair declined sharply last week it found key support from the base of a long-term rising channel and the 50-day Simple Moving Average at just above 19.00, which has so far prevented a deeper slide.
USD/MXN Daily Chart
There is a possibility now that USD/MXN has found stability at these support levels and is launching a recovery leg back up within the channel, thereby extending the medium and long-term uptrends.
USD/MXN formed a Bullish Engulfing candlestick pattern (albeit small) on Wednesday and followed through higher on Thursday, thus providing confirmation. This is another possible sign the short-term trend could be reversing. A close above 19.53 (August 23 swing high), however, would be required to shift the diagnosis to bullish in the short-term.
Alternatively, a decisive break below the lower channel line and 50-day SMA could still be possible, although less likely now. Such a move would alter the outlook and indicate a continuation of the near-term downtrend.
A decisive break would be one accompanied by a long red candle that pierced well below the channel line and closed near its low, or three down days in a row that broke clearly below the line.
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.
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