- The Mexican Peso trades steady after weakening for two days in a row.
- Commentary from the Governor of the Banxico and robust economic data for its key peers weigh on the Peso.
- Traders now await US CPI data as USD/MXN reaches a key technical resistance level.
The Mexican Peso (MXN) trades little changed on Wednesday as markets brace for the release of US Consumer Price Index (CPI) data for April, the main economic highlight of the day, and market sentiment stabilizes.
The Peso has weakened for two days running in most of its pairs, on the back of comments from the Governor of the Bank of Mexico (Banxico), Victoria Rodríguez Ceja, and strong economic data from rivals.
At the time of writing USD/MXN is meeting significant technical resistance at 16.85, EUR/MXN is trading at 18.27 and GBP/MXN at 21.24.
Mexican Peso treads water ahead of US CPI data
The Mexican Peso snakes along on Wednesday ahead of US Consumer Price index data with its potential to shift the outlook for US interest rates and the US Dollar (USD).
Analysts expect the headline CPI to show a 0.4% monthly increase in April and for core to rise 0.3%. This would translate into 3.4% and 3.6% rises respectively year-over-year, decelerating from the previous month’s readings.
A higher-than-expected result might further delay the Federal Reserve’s (Fed) plans to cut interest rates, lending a backwind to the US Dollar (USD) and lifting USD/MXN. The opposite would be the case for a lower-than-expected result.
In Europe, meanwhile, the preliminary Gross Domestic Product (GDP) data for the first quarter came out in line with economists’ expectations, revealing a GDP growth rate of 0.3% in Q1 on a quarterly basis, and 0.4% YoY.
Mexican Peso weakens for two days in a row
The Mexican Peso finished Tuesday in the red, dropping for the second day in a row in its most heavily traded pairs.
The decline was partially due to commentary from the Governor of the Bank of Mexico Victoria Rodríguez Ceja on Monday, who hinted Banxico might consider cutting interest rates in June. The expectation of lower interest rates is negative for a currency as it reduces foreign capital inflows.
Ceja commented, “We could evaluate downward adjustments” to the main reference rate at the Banxico June 27 policy meeting. She went on to note that while headline inflation had continued to rise, underlying prices had not, but much depended on the evolution of the inflationary outlook, reported Christian Borjan Valencia, Editor at FXstreet.
Banxico cut its policy rate from 11.25% to 11.00% at the March meeting, the first rate cut since 2021. However, it chose to keep the policy rate unchanged at the May meeting due to persistent inflationary forces.
Technical Analysis: USD/MXN pull back hits key resistance level
USD/MXN – the value of one US Dollar in Mexican Pesos – has risen to a key resistance level at roughly 16.86, which corresponds with the base of the range it traded in during the second half of April and the first half of May.
USD/MXN had previously broken out of the range and declined sharply to a low of 16.72 on Friday May 10, however, it stalled and reversed course. Since then, it has been making a steady recovery.
USD/MXN 4-hour Chart
The recovery move has now met resistance from the previous range floor. The move could be what technical analysts call a “throwback” – a temporary rebound that happens after breakouts whereby the price returns to the original breakout level to “air kiss” it goodbye one final time before continuing lower.
If this is the case, the pair will probably soon resume its downtrend and eventually surpass the May 10 lows before reaching the conservative target for the breakout, the 0.681 Fibonacci ratio of the height of the range extrapolated lower, at 16.54. Further bearishness could even reach 16.34, the full height of the range extrapolated lower.
A break below the May 10 lows at 16.72 would provide extra confirmation of a continuation south.
Given the medium and long-term trends are bearish, the odds further favor more downside for the pair in line with those trends.
A decisive break back inside the range, however, would reverse the downtrending bias in the short-term and suggest the pair is moving higher. It would also negate the price targets for the breakout.
A decisive break would be one accompanied by a longer-than-average green candlestick that closed near its high or three green candlesticks in a row.
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.
