Mexican Peso gets shot-down after Middle East tensions erupt
- The Mexican Peso rips lower in a volatile sell-off after markets switch risk averse on geopolitical tensions.
- Israel purportedly retaliates against Iran, with explosions heard in the Iranian city of Isfahan.
- USD/MXN surges to just below 18.00 on the news but then retreats and settles in the 17.30s.
The Mexican Peso (MXN) is trading in the 17.30s on Friday after an extremely volatile 24 hours in which the currency depreciated by over five percentage points in some pairs as a result of a mass exodus to safety.
The Mexican Peso was roiled by news reports of an Israeli attack on Iran in retaliation for the April 13 drone attacks by Iran against Israel. According to Reuters, explosions were heard in the Iranian city of Isfahan where a military base is located.
Markets reacted in an extreme way with investors piling into safe-haven assets such as Gold, the Japanese Yen (JPY), the Swiss Franc (CHF) and the US Dollar (USD). At the other end of the spectrum, currencies perceived as “risky” such as the Mexican Peso and the South African Rand got hammered.
This caused the sudden whipsaw in the Mexican Peso’s pairs, as investors in their droves dropped the currency like a hot taco.
Fedspeak also stokes Mexican Peso weakness against USD
The Mexican Peso’s sharp decline was not caused solely by the flight to safety from Israel’s retaliation, but in the case of its most traded pair, the USD/MXN, also because of the impact of more hawkish talk from rate-setters at the US Federal Reserve (Fed).
From expecting three 0.25% interest rate cuts from the Fed in 2024, the mood music now coming out of the US central bank suggests officials only expect one, possibly two, and in extreme cases no cuts to the Fed Funds Rate materializing this year.
Atlanta Fed President Raphael Bostic said on Thursday that US inflation is returning to the Fed’s 2.0% target at a slower pace than anticipated and that interest-rate cuts are likely – but not until year-end.
New York Fed President John Williams went further, saying he didn’t feel an urgency to cut interest rates and that monetary policy is in a good place.
US data also arguably supported the notion that borrowing costs are where they should be due to inflationary tendencies.
The Index of Prices Paid component of the Philadelphia Fed Manufacturing Survey – a regional barometer of inflation – surged unexpectedly to 23.00 (prior 3.7) in April, suggesting price pressures remain very much alive and kicking.
A steady reading for Initial Jobless Claims further reinforced the view that the US labor market is tight and likely to continue to stoke inflation.
Since higher inflation will require the maintenance of higher interest rates to combat it, the odds of the Federal Reserve cutting interest rates keep falling. This is positive for the US Dollar since higher interest rates tend to increase foreign capital inflows.
On the data front, Mexican Peso traders will be keeping an eye on Mexican Retail Sales data out at 12:00 GMT on Friday, although the likelihood of it moving the dial for the Peso remains low.
Technical Analysis: USD/MXN surges
USD/MXN – the value of one US Dollar in Mexican Pesos – broke out of the bullish Pennant price pattern it had formed on the 4-hour chart, surged up to the target for the pattern at roughly 17.43, and then surpassed it.
The breakout higher now suggests a bullish reversal has occurred in both the short and intermediate term trends. This now favors long positions over those time horizons (up to 6 months).
USD/MXN 4-hour Chart
USD/MXN pierced but ultimately failed to hold above a major trendline for the long-term downtrend, suggesting caution should be exercised before becoming uber-bullish over the long term.
That said, peaks and troughs keep rising on the 4-hour chart and, as the old adage goes, “The trend is your friend until the bend at the end,” so more upside is the default expectation in the near term.
The Relative Strength Index (RSI) has risen into overbought territory, suggesting an increasing risk of a pullback. However, RSI is often overbought for long periods of time in strongly trending markets. Nevertheless, traders are advised not to add to their long positions and wait for a pullback into neutral territory before reloading their longs.
A decisive break above the trendline at roughly 17.45 would provide reconfirmation of further upside, and activate an upside target at roughly 18.15.
A decisive break would be one characterized by a longer-than-average green daily candlestick that pierces above the trendline and closes near its high, or three green candlesticks in a row that pierce above the level.
If a pullback persists, support from the 200-day Simple Moving Average (SMA) at 17.17 is likely to provide a foothold for the backsliding price.
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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