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Mexican Peso recovery falters as investors dismiss Banxico intervention warning

  • The Mexican Peso briefly recovered on Thursday after the President of Banxico warned that she will support the Peso if volatility persists.
  • The recovery falters on Friday, however, as traders continue to hit the MXN lower following the June election result.
  • The USD/MXN appears to be ending its correction and resuming its uptrend.

The Mexican Peso (MXN) is trading between half a percentage point and one percentage point lower in its most traded peers on Friday, as markets remain concerned about the proposed policies of Mexico’s newly elected leftist government. The Peso is also pressured by an adjustment in overweight long positions that have accumulated after a multi-year period of appreciation of the Mexican currency.

At the time of writing, a single United States Dollar (USD) buys 18.56 Mexican Pesos, EUR/MXN is trading at 19.87 and GBP/MXN is trading at 23.63.

The Mexican peso temporarily recovers after the statements of the president of Banxico, but then sinks

The Mexican peso retreats and advances on Friday after the strong rebound of the previous day, which occurred after the verbal intervention of the President of the Bank of Mexico (Banxico), Victoria Rodríguez Ceja, who said that Banxico would intervene to support the Peso if the volatility was becoming too “extreme”.

On Friday, however, traders continue to apply pressure in line with the decline since the June 2 Mexican election results. These led to the victory of President-elect Claudia Sheinbaum and her leftist coalition Let’s Keep Making History (SHH). SHH won a supermajority in Mexico’s Chamber of Deputies and fell two seats short in the Senate. This will make it easier for the acting President, Andrés Manuel López Obrador (AMLO), to push through radical amendments to the constitution that have made markets nervous.

The set of 20 proposed amendments and reforms range from rights to higher minimum wages and an increase in state sector pensions, to the abolition of independent regulators and reforms to the judiciary, particularly the controversial idea of ​​replacing the current appointment system of judges by one in which they would be elected by popular vote.

“The main concerns around these amendments are that (i) there will be an erosion of checks and balances and (ii) they would lead Mexico down the path of wage indexation, which would clearly undermine Banxico’s efforts to control inflation, “Jason Porquey, Deputy Chief Economist for Emerging Markets at Capital Economics told FXStreet.

On Wednesday, during his daily broadcast to the masses, AMLO responded to critics of his reforms, saying that the current depreciation of the Peso, which has lost 10% of its value since the elections, has been driven by “speculators” and not by “investors” and is part of a right-wing conspiracy to “blackmail” the government into abandoning proposed reforms.

He further argued that the current system of appointing judges was too open to corruption by elites, politicians and organized crime, resulting in a compromised judiciary. By comparison, his reforms “would make the appointment of judges more democratic, improving the rule of law and actually attracting more, not less, foreign investment,” he said. AMLO also noted that under his administration the Peso had appreciated, while under the five previous presidents it had depreciated, sometimes considerably. AMLO’s critics say he is punishing the Supreme Court for obstructing some of his reforms.

The big drop in the Mexican Peso since the June 2 election could be seen as a late correction from overvalued extremes. The Peso has been in a long-term bullish trend since April 2020, in part due to the extraordinarily high interest rates set by the Bank of Mexico (Banxico), which have made the currency attractive to carry trade traders. . Carry trade traders borrow in currencies with low interest rates such as the Japanese Yen (approx. 0.0%-0.1% in April) and invest in currencies such as the Mexican Peso that offer higher returns (approx. 11, 00% in April), pocketing the difference.

It seems unlikely that the prospect of judicial reforms is the main culprit for the sudden and sharp correction in the MXN. Rather, the elections may have acted as a kind of spark for a bonfire of long positions that had accumulated in the Peso.

“Before the election, we had been arguing for some time that the Peso was looking increasingly overvalued and vulnerable to a sharp decline; the declines of recent weeks have seen it almost touch our year-end forecast of 19.00 (USD/MXN),” Porquey said.

Technical Analysis: USD/MXN likely to resume short-term uptrend

USD/MXN rebounds after its recent correction on Friday, resuming its short- and intermediate-term uptrend.

USD/MXN Daily Chart

Since “the trend is your friend,” the odds favor a continuation of the uptrend, with the next target potentially sitting at 19.22 (March 2023 high).

The Relative Strength Index (RSI) has just broken out of the overbought zone. However, the correction could still deepen, although the established uptrend is likely to eventually resume.

The direction of the long-term trend is in doubt after breaking above the October 2023 high. Before that, it was down.

The Mexican Peso FAQs

The Mexican Peso is the legal tender of Mexico. The MXN is the most traded currency in Latin America and the third most traded on the American continent. The Mexican Peso is the first currency in the world to use the $ sign, prior to the later use of the Dollar. The Mexican Peso or MXN is divided into 100 cents.

Banxico is the Bank of Mexico, the country’s central bank. Created in 1925, it provides the national currency, the MXN, and its priority objective is to preserve its value over time. In addition, the Bank of Mexico manages the country’s international reserves, acts as a lender of last resort to the banks and advises the government economically and financially. Banxico uses the tools and techniques of monetary policy to meet its objective.

When inflation is high, the value of the Mexican Peso (MXN) tends to decrease. This implies an increase in the cost of living for Mexicans that affects their ability to invest and save. At a general level, inflation affects the Mexican economy because Mexico imports a significant amount of final consumption products, such as gas, fuel, food, clothing, etc., and a large amount of production inputs. On the other hand, the higher the inflation and debt, the less attractive the country is for investors.

The exchange rate between the USD and the MXN affects imports and exports between the United States and Mexico, and may affect demand and trade flows. The price of the Dollar against the Mexican Peso is affected by factors such as monetary policy, interest rates, the consumer price index, economic growth and some geopolitical decisions.

The exchange rate between the USD and the MXN affects imports and exports between the United States and Mexico, and may affect demand and trade flows. The price of the Dollar against the Mexican Peso is affected by factors such as monetary policy, interest rates, the consumer price index, economic growth and some geopolitical decisions.

Source: Fx Street

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