USD/MXN falls below 18.80 as US Dollar remains subdued ahead of Nonfarm Payrolls
- USD/MXN loses ground as the US Dollar struggles amid increasing odds of the Fed cutting interest rates.
- Traders await the US Nonfarm Payrolls, which is expected to increase by 110,000 in June.
- The Mexican Peso gained support after Banxico indicated that additional rate cuts would be considered if inflation continues to decline.
USD/MXN edges lower after registering gains in the previous two successive sessions, trading around 18.80 during the European hours on Thursday. The pair depreciates as the US Dollar (USD) loses ground amid rising expectations that the Federal Reserve (Fed) will cut interest rates, driven by the downbeat ADP national employment report.
US ADP Employment Change fell for the first time in more than two years in June. The private-sector payrolls decreased by 33,000 in June after a downwardly revised 29,000 gain in May. This figure came in below the market consensus of 95,000.
Traders await highly anticipated labor market data, including US Nonfarm Payrolls (NFP) and Average Hourly Earnings, due later in the day. Moreover, ISM Services PMI and S&P Global US PMI will also be eyed on Thursday.
The Mexican Peso (MXN) received support as Banxico signaled that further rate cuts would only occur as inflation eases, keeping an attractive real interest rate. Additionally, the confidence is bolstered in the MXN as Mexico’s Fiscal Balance reported a $1.03 billion trade surplus in May, driven by a 1.8% rise in non-oil exports, while remittance inflows hit a record $5.5 billion.
However, Mexico's S&P Global Manufacturing Purchasing Managers Index (PMI) declined to 46.3 in June, compared to the previous reading of 46.7. The reading marked the weakest quarterly average since early 2021, highlighting a sharp decline in new orders as companies cited sluggish demand, project delays, and the effects of US tariffs. Consumer Confidence for June will be eyed later in the day.
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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