- The Mexican Peso edges up on Monday as the market mood remains positive following US and Chinese data.
- The Mexican economy continues to expand despite restrictive monetary policy – a positive for the Peso.
- Technically, the USD/MXN is trading along the floor of a sideways range in the short-term.
The Mexican Peso (MXN) trades marginally higher on Monday, supported by a rise in risk appetite after lower-than-expected US jobs’ data raised hopes the Federal Reserve (Fed) will move to cut interest rates, reducing borrowing costs for businesses and consumers.
The positive market mood continued into the Asian session on Monday on the back of Chinese data, further supporting the Peso which appreciates in risk-on environments.
USD/MXN is trading at 16.92, EUR/MXN at 18.22 and GBP/MXN at 21.28, at the time of publication.
Mexican Peso trades higher as market mood remains upbeat
The Mexican Peso edges higher on Monday as Asian stock markets rally after the release of the China Caixin Services PMI data shows continued expansion, and following weak US jobs data on Friday, which increased hopes interest rates might fall. In Japan the Nikkei closed 0.93% higher, China’s Shanghai Composite trades 1.16% higher at time of writing and the Hang Seng is up 0.53%.
Mexican data surprisingly good
In Mexico, the flow of recent economic data continues to point to an economy that is performing surprisingly well under the yoke of the historically high interest rates imposed by the Bank of Mexico (Banxico) to curb inflation.
Although the GDP growth rate in Mexico was lower on a yearly basis in Q1 it rose 0.2% quarter-on-quarter; April’s Manufacturing PMI remained in expansive territory; Business Confidence in April edged lower but not by much, and Gross Fixed Investment in February beat expectations.
Additionally, in a recent poll, a majority of private analysts expected inflation to rise to 4.20% in 2024, which was up from the March estimate of 4.10%, revealed Banxico.
The data points to Banxico likely keeping interest rates at their elevated 11.0% for now, which supports the Peso since it boosts foreign capital inflows.
Technical Analysis: USD/MXN lies on the floor of short-term range
USD/MXN – the cost of one US Dollar in Mexican Pesos – is still range bound and trending sideways in the short-term. The pair has been oscillating between a floor at 16.86 and a ceiling at 17.40 since the April 19 blow off.
USD/MXN 4-hour Chart
Given the old trading maxim, the “trend is your friend”, the short-term trend is expected to continue until the weight of evidence proves otherwise. Although USD/MXN made an attempt to break out of its range on Friday, bearish pressure was insufficient to push through and prices recovered back inside the range. There is a slight bearish bias, however, given the medium and long-term trends are bearish and these bigger currents influence the shorter-term perspective.
The Moving Average Convergence Divergence (MACD) indicator has crossed above its signal line, offering a buy signal which could suggest the pair is about to start rising back up within its range.
More upside could take the USD/MXN up to the 50 Simple Moving Average (SMA) on the 4-hour chart at 17.06, followed by the lower high at 17.15. A clear break above the zone of resistance around 17.15-17.18 might see further gains up towards the range highs again.
A decisive breakout of the range – either below the floor at 16.86, or the ceiling at 17.40 – would change the directional bias of the pair.
A break below the floor could see further downside to a target at 16.50, followed by the April 9 low at 16.26.
On the other side, a break above the top would activate an upside target first at 17.67, piercing a long-term trendline and then possibly reaching a further target at around 18.15.
A decisive break would be one characterized by a longer-than-average green or red daily candlestick that pierces above or below the range high or low, and that closes near its high or low for the period; or three green/red candlesticks in a row that pierce above/below the respective levels.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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