Mexican Peso drops on Banxico's rate cut hopes

• Mexican Peso slips as investors worry about the potential approval of controversial judiciary reforms, which could increase political risks.
• Morena's supermajority in Congress heightens fears of constitutional changes, leading to greater concentration of power and higher risk premiums.
• Dovish comments from Banxico Deputy Governor Galia Borja add pressure.

The Mexican Peso begins the week on the back foot, reversing most of last Friday’s gains. Losses of over 1.80% are seen in the Peso amid fears that the Mexican Congress could approve the Judiciary Reform bill and dovish comments from Deputy Governor Galia Borja. At the time of writing, the USD/MXN trades at 19.42 after bouncing off a daily low of 19.08.

Last Friday, the Instituto Nacional Electoral (INE) approved the Morena ruling party's supermajority in the Mexican Congress, raising investors' concerns that approving controversial changes to the Mexican Constitution could increase the country’s risks.

This is one of Monday's main drivers of USD/MXN price action. Now that Morena controls the lower house, the risks of the judiciary reform being approved have heightened, weighing on the Mexican Peso. Some analysts cited by El Financiero asserted that constitutional changes could lead to a greater concentration of power in the executive and impact the state of law.

Last week, Morgan Stanley recommended to its clients not to invest in shares in Mexico, citing fears that the judiciary reform could increase risk premiums in the country.

On Monday, Bank of Mexico Deputy Governor Galia Borja was interviewed by El Economista. She said that since June’s decision when the Governing Council left rates unchanged at 11.00%, they already had some elements about an economic slowdown in the second quarter.

“In the August decision, it was confirmed that economic activity was weakening compared to what we expected, which was effectively confirmed with the GDP data for the 2nd quarter,” said Borja.

She said that March and August rate cuts do not imply the abandonment of restrictive policy. Borja added that “the fact that we are adjusting it as has happened in March and August (of 2024) does not mean that we are going to the neutral or accommodative territory. That will take some time. So, from now on, there will still be another period in which the restrictive monetary stance will continue.”

Mexico’s economic docket will remain light. The Balance of Trade is expected to be released on August 27.

Across the border, Federal Reserve (Fed) Chair Jerome Powell, giving the green light last week to begin easing monetary policy, hurt the Greenback against most G7 FX currencies. Nevertheless, the US Dollar has gained some ground against the emerging market Mexican Peso.

Daily digest market movers: Mexican Peso depreciates also on geopolitical risks

• Another driver that weakened the Peso was the escalation of the Israel-Hezbollah conflict in the Middle East.
• Mexico's Balance of Trade is expected to show a deficit of $-1.47 billion in July, wider than June’s $-1.03 billion.
• Traders will eye the release of US Conference Board Consumer Confidence for August, Fed speakers, the release of Q2’s 2024 GDP, and the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Price Index (PCE).
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 97 basis points (bps) according to the fed funds rate futures contract for December 2024.

Technical outlook:  Mexican Peso weakens as USD/MXN jumps above 19.30

The USD/MXN daily chart suggests the uptrend remains intact, though buyers need to lift the exchange rate above last week’s peak at 19.53, which could exacerbate a rally to the 20.00 psychological figure. If those levels are cleared, the next stop would be the year-to-date (YTD) high at 20.22.

Conversely, if USD/MXN tumbles below 19.00, this could pave the way for a leg-down. The first support would be the August 19 low of 18.59, followed by the 50-day Simple Moving Average (SMA) at 18.48.

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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