Mexican Peso sinks, drops for fifth straight session

• Mexican Peso falls to seven-week low as trade deficit hits worst level since August 2020.
• INEGI data shows Mexican exports and imports plunged, with exports contracting 5.7% YoY.
• Upcoming US economic reports and FOMC decision expected to keep USD/MXN rally alive.

The Mexican Peso depreciated sharply as the week began after data revealed Mexico’s Balance of Trade deficit widened — its worst reading since August 2020, according to data revealed by the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI). This, along with the strength of the US Dollar, keeps the USD/MXN trading at 18.67, gaining more than 1.20%.

INEGI revealed that Mexico’s Exports and Imports plunged, though the former contracted -5.7% YoY, the steepest drop in 46 months. The data weighed on the Mexican Peso, which weakened to a seven-week low as the USD/MXN accelerates toward testing the year-to-date (YTD) high of 18.99.

The US economic docket will be busy. Market participants prepare for the Federal Open Market Committee (FOMC) monetary policy decision, the release of the Institute for Supply Management (ISM) Manufacturing PMI, and the Nonfarm Payrolls (NFP) report, both figures for August and July, respectively.

This and month-end flows favoring the Greenback will likely keep the USD/MXN exotic pair upwardly pressured. Although the FOMC is expected to hold rates unchanged and lay the ground for the Federal Reserve's (Fed) first interest rate cut, investors underpinned the buck ahead of the decision.

MUFG Bank wrote in a note, “The unwind of high-yielding Latam FX carry trades over the past week has also been triggered by more risk-off trading conditions.” Wall Street confirmed this, with most US equity indices retreating from all-time highs, while safe-haven currencies like the Japanese Yen, the Swiss Franc and the Greenback advanced.

Daily digest market movers: Mexican Peso undermined by wider deficit

• Mexico’s Balance of Trade in June was $-1.073 billion, missing the consensus of $1 billion.
• According to Citi Research, analysts now estimate that annual inflation will end at 4.30%, up from the previous forecast of 4.20%, with core inflation expected to finish 2024 at 4.0%. Mexico's economic growth is projected to slow with an expected growth rate of 1.9%, down from 2.0% in the last poll.
• Last week’s US inflation data suggested that progress toward lowering it to 2% continues, yet it seems stickier than expected after June’s Core PCE figures were above estimates in monthly and yearly figures.
• USD/MXN traders are awaiting the release of JOLTs Job Openings for June, ahead of the ADP Employment Change and FOMC’s decision on Wednesday.
• Data by the Chicago Board of Trade (CBOT) shows that traders are pricing in 54 basis points (bps) of easing toward the end of the year, as shown by the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso extends losses as USD/MXN closes to 18.70

The uptrend continues, as shown by the USD/MXN hitting the 18.70 mark due to month-end flows and risk-aversion, which has undermined high-yielding currencies like the Peso. Momentum is bullish, confirmed by the Relative Strength Index (RSI) reading above the 50-neutral line.

If bulls challenge the YTD high at 18.99, that could open the door to test 19.00. Once surpassed, the next resistance would be the March 20, 2023, peak at 19.23 before challenging 19.50.

Conversely, if USD/MXN retreats beneath 18.00, that would pave the way to challenge the 50-day Simple Moving Average (SMA) at 17.89, the first support level. The next support would be the latest cycle low of 17.58; the July 12 high turned support. A breach of the latter will expose the January 23 peak at 17.38.

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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