Mexican Peso reverses uptrend on the short-term horizon
- The Mexican Peso has reversed its entrenched uptrend in the short term.
- The move comes after the IMF revised down their economic growth forecasts for Mexico.
- USD/MXN is rising after comments from Fed Chair Jerome Powell suggest interest-rate cuts could be further delayed.
The Mexican Peso (MXN) is trending lower in the majority of its most heavily traded pairs on Wednesday. This is due to a combination of factors, including the decision by the International Monetary Fund (IMF) to downgrade its economic growth forecasts for Mexico in 2024-2025, as well as fading Oil prices – a key export for the country.
The impact of stubbornly high inflation in the US and recent remarks from the Chairman of the Federal Reserve (Fed), Jerome Powell, that suggest the Fed may not cut interest rates until September (from previous expectations of June), were further factors posited as influencing the Mexican Peso’s reversal in fortunes.
Mexican Peso declines after IMF revises down growth
The Mexican Peso is taking another step lower after the IMF downgraded its growth forecasts for Mexico over the next two years on Tuesday. It reduced its 2024 forecast to 2.4% from 2.7% and 1.4% in 2025 from 1.5% previously estimated.
“The forecast for Mexico is revised downward on account of weaker-than-expected outcomes for end-2023 and early 2024, with a contraction in manufacturing,” the IMF said in its latest World Economic Outlook report.
This follows similar downgrades from the Banxico in February, when it reduced its growth forecast to 2.8% from 3.0% in 2024, as per The Wall Street Journal.
The fall off in growth is anticipated as a result of lower government spending in an effort to bring down the budget deficit.
“Mexico’s Ministry of Finance expects the fiscal deficit to decrease from 5% to 2.5% of the Gross Domestic Product (GDP) next year, which would imply a cut in spending of 833.6 billion Pesos, according to the Pre-General Policy Criteria Economic 2025,” says Christian Borjon Valencia, Editor at FXStreet.com
In its March meeting, the Banxico reduced interest rates from 11.25% to 11.00% due to evidence of lower inflation and growth. However, the move failed to completely reverse the Mexican Peso’s long-term uptrend.
Higher inflation in the US and recent comments from Fed Chairman Powell, however, may have reversed the trend for the Peso – in particular against the US Dollar.
On Tuesday, Powell said, “Recent data shows a lack of further progress on inflation this year,” adding, “If higher inflation persists the Fed can maintain current rate as long as needed.”
Higher interest rates tend to be positive for a currency as they increase foreign capital inflows. The opposite is true for lower interest rates. Given the divergence in the two country’s monetary policy stances, with Banxico cutting and the Fed holding, the Mexican Peso’s long-term appreciation versus the Buck looks at risk of breaking down.
Technical Analysis: USD/MXN reverses trend in the short-term
USD/MXN – the value of one US Dollar in Mexican Pesos – has probably reversed its short-term downtrend.
The peaks and troughs of price are rising on the 4-hour chart used by many analysts to assess the short-term trend. This suggests the pair is now in an uptrend, favoring bulls.
USD/MXN 4-hour Chart
One caveat to the bullish outlook is that the Relative Strength Index (RSI) is pulling back from overbought into neutral territory. Given price is also declining, the two taken together could be signaling the start of a correction. When the RSI moves out of overbought territory it is a signal for short-term time horizon traders to close long positions and open short trades.
If the pair continues pulling back it could fall to the 50-day Simple Moving Average (SMA) at 16.82 and find support there. Given the dominance of the short-term uptrend, however, it is likely to eventually recover and start going higher.
A break above Tuesday’s high at 17.09 would indicate a continuation of the uptrend to the next target, possibly located at 17.17 where the 200-day SMA is situated, followed by resistance from a long-term trendline and resistance level at around 17.37.
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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