Mexican Peso continues decline on geopolitical tensions

• The Mexican Peso weakens in most pairs on increased risk aversion. 
• The Peso fell against the US Dollar after strong US economic data strengthened the buck on Thursday. 
• USD/MXN could be in a new short-term uptrend after breaking above a trendline.

The Mexican Peso (MXN) declines in most pairs on Friday as widespread risk aversion, on the back of geopolitical concerns, disproportionately weigh on the Peso, a risk-on currency. 

More specifically, MXN recently weakened against the US Dollar, threatening to reverse the Peso’s short-term trend, after a slew of positive economic data from the US further delayed the time the Federal Reserve (Fed) is expected to lower interest rates, supporting the Greenback. 

USD/MXN is trading at 16.70 at the time of writing, EUR/MXN is trading at 18.11 and GBP/MXN at 21.25. 

Mexican Peso falls on geopolitical risk and US data

The Mexican Peso loses ground on Friday as the news that China has started a second day of war games around Taiwan ratchets up geopolitical tensions. The news added to reports of a continued escalation in conflicts in Gaza and Ukraine. 

US data released on Thursday showed a surprise rise in US preliminary Purchasing Manager Index (PMI) for May – especially in Services sector – and led to a substantial fall in the MXN against the USD. 

The US data came after the release of hawkish Fed meeting Minutes from the April 30-May 1 meeting, in which policymakers repeated their mantra that more work needed to be done to bring down inflation and even discussed the possibility of hiking rates.  

Bank of Mexico releases meeting Minutes

Mexican data released on Thursday mostly came out in line with estimates, but the Q1 Gross Domestic Product (GDP) showed a surprise upward revision to 0.3% on a quarter-on-quarter basis compared to the 0.2% previous estimate. This temporarily boosted the Mexican Peso in its pairs. 

The release of the Bank of Mexico (Banxico) May meeting Minutes showed most policymakers continued to see upside risks to inflation despite data showing core inflation continuing to decline. Persistent inflation in the Services sector was seen as a key stumbling block to inflation falling to Banxico’s 3.0% target. 

The Minutes showed the decision to keep interest rates at 11.00% was unanimous. 

In its concluding statements, Banxico’s Governing Board said: “challenges and risks prevail, which requires monetary policy to continue being managed prudently.”

Adding, “With this decision, the monetary policy stance remains restrictive and will continue being conducive to the convergence of inflation to the 3% target in the forecast horizon.”

Technical Analysis: USD/MXN breaks above trendline and continues rising

USD/MXN – or the number of Pesos that can be bought with one US Dollar – rises after breaking above the trendline for the April-May decline. This could possible indicate the pair is now in a short-term uptrend, favoring long positions over shorts. 

USD/MXN 4-hour Chart 

A break above Thursday’s high at 16.76 would confirm a continuation of the young uptrend to a possible target at the previous range lows around 16.85. 

Given the medium and long-term trends are bearish, however, there remains a high risk of the short-term trend reversing and the pair continuing lower. 

A decisive break below the grey trendline for the up move at roughly 16.68 would bring the short-term uptrend into doubt and possibly signal the resumption of more downside.