The Mexican Peso holds minuscule gains versus the US Dollar in early trading during the North American session, sponsored by economic data from Mexico. In the US, the release of the JOLTs reports and Conference Board (CB) Consumer Confidence data could underpin the Greenback (USD), ahead of the US Federal Reserve (Fed) monetary policy decision on Wednesday. The USD/MXN exchanges hands at 17.19, down 0.13%.
Mexico’s economy grew below estimates, revealed the National Statistics Agency (INEGI). Higher interest rates set by the Bank of Mexico (Banxico) at 11.25% is having the desired effect on the economy as the latest GDP data trends lower alongside business activity. Across the border, CB Consumer Confidence improved in January, while the labor market remains hot, according to the JOLTs data.
The USD/MXN trades sideways and is about to form an ascending triangle. The 200-day Simple Moving Average (SMA) at 17.34 is the first resistance level. If buyers conquer that level, the next stop would be the 100-day SMA at 17.41, followed by the December 9 high at 17.56. Last of all sits the May 23 high from last year at 17.99.
On the flipside, although a less likely scenario, the USD/MXN exchange rate could drop below the 50-day SMA at 17.13. A breach of the latter will expose the January 22 low at 17.05, followed by the 17.00 psychological level.
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.