Mexican Peso rockets to 3-day high, ends week with 1% gain

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  • Mexican Peso hit an eight-day high of 17.99 before losing traction.
  • Light economic week in Mexico; upcoming data includes May CPI, Consumer Confidence, and Banxico meeting minutes.
  • US Nonfarm Payrolls exceed expectations; revisions to prior months fuel predictions of Fed easing.

The Mexican Peso was virtually flat against the US Dollar on Friday after seesawing within the 17.99 – 18.19 range. Mixed US jobs data sparked speculation that the Federal Reserve (Fed) could cut interest rates in September, sending the emerging market currency soaring before the USD/MXN trimmed its losses and traded at 18.08, posting minimal daily gains of 0.02% and set to end the week up at around 1.20%.

Wall Street trades mixed, while the Greenback stages a slim recovery against the Mexican currency. Mexico’s economic docket is empty, with traders eyeing the release of the Consumer Price Index (CPI) for May next week, along with Consumer Confidence and the Bank of Mexico’s (Banxico) last monetary policy meeting minutes.

The US Nonfarm Payrolls report for June beat estimates, though downward revisions to April and May’s figures prompted traders to increase their bets that the Fed will begin its easing cycle in September.

Additional data showed that Average Hourly Earnings (AHE) were flat monthly but dipped in the twelve months to June and the Unemployment Rate rose, according to the US Bureau of Labor Statistics (BLS).

Following the data release, US Treasury yields tumbled, with the 10-year benchmark note rate falling six-and-a-half basis points to 4.284%, a headwind for the US Dollar. Meanwhile, the US Dollar Index, which tracks the buck’s performance against six currencies, dropped 0.12% yet trimmed some earlier losses and is currently around 105.00.

According to the CME FedWatch Tool, the odds for a September 2024 cut are 70% higher than the chance a day ago of 66%.

Daily digest market movers: Mexican Peso rises further on US Dollar weakness

  • Banxico’s survey showed that economists estimate the Gross Domestic Product (GDP) to end the year at 2%, down from 2.1%. They expect Banxico to cut rates from 11.00% to 10.25%, up from 10.00% projected in May.
  • Some analysts in Mexico estimate the economy might slow down but dodge a recession, according to the National Statistics Agency (INEGI) Coincident Indicator. Despite that, they said reforms pushed by President Andres Manuel Lopez Obrador (AMLO), particularly the judiciary reform, could affect the country’s creditworthiness.
  • US Nonfarm Payrolls grew by 206K, exceeding the estimated 190K, but April and May were revised lower from 165K to 108K and 272K to 218K, respectively.
  • Average Hourly Earnings (AHE) edged lower from 4.1% to 3.9% YoY, as expected, while the Unemployment Rate rose from 4% to 4.1%.

Technical analysis: Mexican Peso stays near weekly lows, USD/MXN hovers around 18.10

The USD/MXN dropped to an eight-day low of 17.99 just to find bids that pushed the exchange rate back toward the 18.10 area. Friday’s price action is forming a Doji candle, an indication that neither buyers nor sellers are winning the battle that could keep the exotic pair trading within the 18.00-18.10 in the short term.

Momentum shows a slight recovery as the Relative Strength Index (RSI) turned flat in bullish territory after posting three days of lower readings. This confirms the USD/MXN range-bound trading.

For a bullish resumption, the USD/MXN must surpass 18.10, followed by a rally above the June 28 high of 18.59, so buyers can challenge the YTD high at 18.99. Conversely, sellers will need a drop below 18.00, which could extend the pair’s decline toward the December 5 high, which turned support at 17.56, followed by the 50-day Simple Moving Average (SMA) at 17.37.

Mexican Peso FAQs

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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