- The Mexican Peso weakens after the release of lower inflation data.
- This is expected to speed-up interest-rate cuts by the Bank of Mexico, reducing inflows.
- The US Dollar resurfaces from the depths, reviving USD/MXN’s medium-term uptrend.
The Mexican Peso (MXN) trades mixed in its most heavily-traded pairs on Thursday after weakening for two days in a row. The Peso began to fall at the start of the week due to a pronounced risk-off tone permeating markets, which tends to disproportionately disadvantage emerging market currencies.
Sentiment soured as investors made clear their disappointment at the lack of stimulus measures announced by the China National Development and Reform Commission (NDRC) over the weekend. These concerns later eased, however, after China’s Finance Ministry said it would announce a fresh package of fiscal measures on October 12.
On Wednesday, the Peso continued to weaken following the release of lower-than-expected Mexican inflation data. This showed that in the 12 months to September the headline rate of inflation fell to 4.58%, from 4.99% recorded in August. A strengthening US Dollar (USD) supplied a further headwind.
The decline in inflation increases the probability of the Bank of Mexico (Banxico) will make deeper cuts to interest rates in the near future. This, in turn, could reduce foreign capital inflows, resulting in lower demand for the Mexican Peso.
Mexican Peso could find support from new wage laws
The Mexican Peso might gain some support from new wage laws passed on Wednesday which enshrine in the constitution workers rights to see their wages rise in line with inflation.
“With 124 votes in favor, the Senate of the Republic approved in general and in particular the reform to establish the annual fixing of general or professional minimum wages, as well as their revision, and that they never be below inflation,” reported El Financiero.
“The purpose of the reform is to ensure that Mexicans’ income does not fall below inflation, which will favor their purchasing power. Therefore, year after year, increases or adjustments could be made based on inflation,” the report went on.
The benchmarking of wages to inflation could slow the disinflationary trend, if workers continue spending at current rates. In addition, if businesses pass on inflation-linked employee wage costs to consumers this will also maintain inflation.
Continued elevated inflation would, in turn, delay any cuts to interest rates planned by Banxico – or make the reductions more gradual – with the side-effect of propping up the Mexican Peso.
Sheinbaum takes control of Mexican Oil
The Mexican Peso has seen volatility due to rising political risk premia since the re-election of the Morena-led government in June and this could revive as foreign investors digest the news that President Claudia Sheinbaum is moving to take greater control of Mexico’s Oil state-backed industry.
On Wednesday, Mexico’s Congress debated the reclassification of two of Mexico’s largest Oil producers, Pemex and the Federal Electricity Commission (FEC) with a view to increasing their control of the companies and renaming them as “public enterprises.” The change “would force them to prioritize the government’s social and economic objectives over corporate profits,” according to El Financiero.
The reform was initially proposed by Sheinbaum’s mentor and predecessor, former President Andrés Manuel López Obrador (AMLO), and is expected to win the approval of the ruling coalition’s decisive majority in Congress.
Technical Analysis: USD/MXN starts rising from base of channel
USD/MXN starts to recover after touching the base of a medium-term rising channel.
USD/MXN Daily Chart
USD/MXN is probably starting a new uptrending leg within its ascending channel. The medium and longer-term trends are bullish, and given the technical analysis principle that “the trend is your friend,” this favors a continuation higher.
On October 4 the pair formed a bullish Japanese Hammer candlestick pattern at the base of the channel (orange rectangle on the chart). This was followed by a slightly bullish Japanese Doji candlestick and then two green up candles. This configuration marks the reversal of the short-term trend which is now technically bullish.
USD/MXN has just reached resistance at 19.51 (August 22 high) if it can break above 19.57 it will signal a clearance of this resistance and a probable continuation higher to the next upside target at around 19.83 (October 1 high).
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.
