Mexican Peso post gains against US Dollar ahead of AMLO-Sheinbaum’s reunion

Mexican Peso post gains against US Dollar ahead of AMLO-Sheinbaum’s reunion
  • Mexican Peso erased its earlier losses yet remains fragile after hitting 14-month low of 18.65 earlier.
  • Political turmoil in Europe and Mexico’s domestic reforms contribute to emerging market currency volatility.
  • USD/MXN traders focus on upcoming US CPI data and FOMC decision, expected to trigger volatility in the pair.

The Mexican Peso stabilized against the US Dollar on Monday, following remarks  from outgoing President Andres Manuel Lopez Obrador. Nevertheless, Morena’s Party leader Mario Delgado insisted on AMLO’s reforms submitted in February of 2024, a headwind for the emerging market currency. Therefore, the USD/MXN trades at around 18.20, printing losses of more than 1%.

Risk appetite seems to have improved despite European political turmoil, which triggered a flight to safety and hurt emerging market currencies. The Greenback remains firm against a basket of six currencies while traders await Wednesday’s Federal Open Market Committee (FOMC) interest rate decision.

Back to Mexico’s domestic issues, Mexican President AMLO and virtual President Claudia Sheinbaum are having a meeting, which would conclude at around 17:00 Mexico City time. At the end of the meeting, Sheinbaum will host a press conference, according to her team. That has calmed the financial markets following last week’s remarks of President AMLO and Morena’s Mexican Congress leader Ignacio Mier, with both stating they would pass the judicial reform and the disappearance of autonomous bodies.

Earlier, the Mexican Peso hit a 14-month low as the USD/MXN reached 18.65 before reversing its course.

Last Thursday, Mexico’s President-elect Claudia Sheinbaum said that “no decision had been made on a package of constitutional reforms put forward by [the] outgoing president,” via Reuters.

USD/MXN traders should know that the pair will be extremely sensitive and volatile amid political uncertainty in Mexico.

Aside from politics, Mexico’s economic docket will feature Industrial Production for April. Across the border, on Wednesday, US Consumer Price Index (CPI) data from May is expected to remain stickier, ahead of the Federal Reserve’s (Fed) monetary policy decision.The latest US data suggests that the Fed will keep rates unchanged and adhere to its “higher for longer” mantra.

Daily digest market movers: Mexican Peso halts its freefall as AMLO’s backpedals

  • AMLO’s proposals submitted to Mexican Congress in February 2024 include a reform of the Supreme Court, which proposes that the Supreme Court’s ministers be elected by popular vote; electoral reform, which seeks to have INE councilors elected by popular vote and reduce multi-membership; and reform of autonomous bodies, which entails the dissolution of the transparency body.
  • Mexican Peso depreciation could weigh on the Bank of Mexico’s (Banxico) decision to ease policy, even though last month’s core inflation slowed. Therefore, keeping interest rates higher could prompt deceleration in the economy and increase the odds of a recession.
  • Morgan Stanley noted that if Mexico’s upcoming government and Congress adopted an unorthodox agenda, it would undermine Mexican institutions and be bearish for the Mexican Peso, which could weaken to 19.20.
  • Last week’s US data decreased the odds for a Fed rate cut in September, according to the CME FedWatch Tool, from above 50% to 46.7%.
  • December’s 2024 fed funds futures contract hints that investors expect 28 basis points of rate cuts by the Fed throughout the year.

Technical analysis: Mexican Peso appreciates, but the bias shifted bearish

The USD/MXN remains bullishly biased even though the rally stalled after hitting a multi-month high of 18.65, which sponsored a leg down toward the current exchange rate.  Last Friday, I wrote, “a fifth daily close above a four-year-old downslope resistance trendline drawn from all-time highs (ATH) at around $25.77, which was broken on Monday. That could be the last nail in the coffin for the Mexican Peso’s strength.”

That was achieved, and the pair pushed toward 18.65, yet buyers are taking a respite before extending their gains. That said, the USD/MXN’s next resistance would be the October 6 high of 18.48, followed by today’s high of 18.65. Once cleared, the next stop would be the psychological 19.00 figure. Overhead resistance levels lie ahead, like the March 20, 2023, high of 19.23, followed by the psychological 20.00 mark.

On the other hand, sellers need to push the USD/MXN back below the April 19 high of 18.15 if they would like to keep the pair within the 18.00-18.15 trading range.

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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