Mexican Peso holds gains on Thursday amid robust economic data
- Mexican Peso remains stable against US Dollar alongside solid April Retail Sales data.
- Political uncertainty over AMLO's judiciary reforms limits further gains, with key announcements expected from President-elect Sheinbaum.
- US housing sector weakens and softer jobs data emerge.
- Fed's Kashkari suggests disinflation may take a year or two.
The Mexican Peso clung to gains against the US Dollar on Thursday after economic data showed the country’s economy remains robust. However, political uncertainty about a pending judiciary reform caps the emerging market currency's advance. The USD/MXN exchanges hands at 18.40, virtually unchanged.
Mexico’s economic docket revealed solid Retail Sales in April, exceeding estimates and March’s figures. Later on Thursday, President-elect Claudia Sheinbaum will reveal the names of six cabinet members who have collaborated with her since October 1.
In the meantime, political noise about President Andres Manuel Lopez Obrador's (AMLO) reforms submitted to the congress had waned, as reflected by the USD/MXN stabilizing at around 18.40-18.50. Nevertheless, this consolidation could be the calm before the storm, as the newly elected Mexican congress will begin on September 1.
Across the border, the US housing sector continued to deteriorate, while jobs data was softer than expected. Federal Reserve speakers continued to cross the newswires, with Minneapolis Fed President Neel Kashkari speaking.
Kashkari stated that it will probably take a year or two to lower core inflation to 2%. He added the path of interest rates would depend on the economy, emphasizing, “We are getting disinflation despite remarkable economic growth.”
Daily digest market movers: Mexican Peso remains flat despite posting strong Retail Sales
- Mexican Retail Sales in April increased from 0% to 0.5%, above estimates of -0.3% MoM. They jumped from -1.7% to 3.2%, more than doubling projections by analysts for the 12 months to April.
- USD/MXN stabilizes following last week’s verbal intervention by Banxico Governor Victoria Rodriguez Ceja, who said the central bank is attentive to volatility in the Mexican currency exchange rate and could act to restore “order” in markets.
- Volatility in the USD/MXN exchange rate could prevent Banxico from cutting interest rates for the second time in the year at the upcoming meeting on June 27. A rate cut could weaken the Mexican Peso and expose the USD/MXN year-to-date high at 18.99.
- US Initial Jobless Claims for the week ending June 15 climbed 238K, exceeding estimates of 235K but lower than the previous reading of 243K.
- US Building Permits plunged 3.6% in May, from 1.44 million to 1.386 million. Housing Starts for the same period dropped from 1.352 million to 1.277 million, a fall of 5.5%.
- The CME FedWatch Tool shows odds for a 25-basis-point Fed rate cut at 58%, down from 62% on Wednesday.
Technical analysis: Mexican Peso consolidates at around 18.30-18.50
The USD/MXN shifted upward bias despite consolidating within the 18.30-18.50 range during the last four days. Momentum supports buyers as the Relative Strength Index (RSI) remains bullish.
For a bullish continuation, the USD/MXN must clear 18.50 if buyers want to retest the year-to-date high of 18.99. A breach of the latter will expose the March 20, 2023, high of 19.23. If that price is cleared, this will sponsor an uptick to 19.50, ahead of the psychological 20.00 mark.
Conversely, if sellers push prices below the April 19 high of 18.15, the exotic pair will be kept within the 18.00-18.15 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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