USD/MXN jumps above 19.00 on geopolitical risks
- USD/MXN gains traction to near 19.05 in Friday’s early European session, up 0.98% on the day.
- Escalating Israel-Iran tensions provide some support to the US Dollar.
- Rising Fed rate cut bets and higher oil prices might cap the upside for the pair.
The USD/MXN pair gathers strength to around 19.05, snapping the two-day losing streak during the early European session on Friday. The risk-off sentiment amid escalating Israel-Iran tensions exerts some selling pressure on the Mexican Peso (MXN) against the Greenback. Traders will keep an eye on the preliminary reading of the US Michigan Consumer Sentiment report, which will be released later on Friday.
Israel launched a series of airstrikes against Iran early Friday morning, raising fears of wider geopolitical tensions in the region, per CNBC. Israel’s Defense Minister Israel Katz declared a state of emergency shortly after the attack began and warned people that “a missile and drone attack against the State of Israel and its civilian population is expected in the immediate future.”
Iranian state media conveyed a statement from Iran's Armed Forces General staff that the US and Israel will receive a "harsh blow" in response. Investors will closely monitor the developments surrounding conflicts between Israel and Iran. Any signs of escalating tensions between those countries could boost the safe-haven flows, supporting the US Dollar (USD).
On the other hand, a rise in Crude oil prices could help limit the Mexican Peso’s losses as Mexico is a major oil exporter and higher crude oil prices tend to have a positive impact on the MXN value.
Data released on Thursday showed US producer prices increased less than expected in May, weighing on the Greenback. The latest data followed Wednesday’s cooler-than-anticipated Consumer Price Index (CPI) report for May. Traders see an 80% odds of a September Fed rate cut, with a second rate cut as soon as October, versus December as seen before the inflation data, according to the CME FedWatch tool.
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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