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The Mexican Peso (MXN) trades lower by over half a percent against the US Dollar (USD) at 17.17 just after the release of preliminary Gross Domestic Product data from the US Bureau of Economic Analysis. The data shows the US economy grew at a 1.7% annualized pace in Q1. This compares with the 3.4% of the previous quarter and is below the 2.5% expected.
Despite the lower-than-expected annualized GDP data the US Dollar rises against the Mexican Peso in the minutes following the release. This may be because a denoter of inflation, the preliminary Gross Domestic Product Price Index for Q1 came out at 3.1% which was substantially higher than the 1.7% of the previous quarter. It suggests stubbornly high inflation in the US economy that will lead the Federal Reserve (Fed) to keep interest rates higher for longer. Higher interest rates are in turn positive for USD since they attract great inflows of foreign capital.
In addition, higher-than-expected Core Personal Consumption Expenditures in Q1, which is also a measure of inflation, showed a 3.7% rise QoQ compared to estimates of 3.4% and a previous reading of 2.0%.
The Peso had already been weakening amid a souring market sentiment and rising geopolitical tensions given its sensitivity to risk.
The Mexican Peso is down against the Euro on Thursday after benchmark German Bund yields spiked higher following comments from the President of the Bundesbank and European Central Bank (ECB) governing council member, Joachim Nagel.
Nagel said, on Wednesday, that although the ECB would still probably go ahead with a rate cut in June, further cuts down the road might not follow.
Continued stubborn wage-related inflation in the services sector was the main bugbear, said Nagel, who added that until inflation had come down in a sustainable manner the ECB could not commit to a “pre-commit to a particular rate path.”
The Mexican Peso (MXN) limps higher against the US Dollar (USD) in early trading on Thursday after a volatile midweek that saw the Peso eventually lose to the Greenback following better-than-expected US Durable Goods Orders on Wednesday.
The US Census Bureau revealed that Durable Goods Orders in the United States increased 2.6% MoM in March, up from a 0.7% rise previously, and beating estimates of 2.5%. The data provided something of an antidote to the poor performance of US Manufacturing and Services PMI data released on Tuesday.
USD/MXN corrects in its short-term downtrend but more weakness is probably eventually on the cards.
A break below Wednesday’s swing low at 16.91 would confirm further downside to the next key support level at April 17 low at 16.86, where a major Moving Average sits, providing dynamic support on a higher time frame chart. A decisive break below 16.86 could usher in further weakness to 16.50 and then the April 9 low at 16.26.
On the other side, a decisive break above the major trendline for the long-term downtrend at roughly 17.45 will be required to change the trend back to bullish, and activate an upside target at around 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.
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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