- The Mexican Peso extends its weakness for the fourth consecutive day, as multiple risks lead traders to press “sell.”
- Trump’s tariff threats, a critical IMF report, political risks and weak data combine to weigh on the Mexican currency.
- USD/MXN extends its rally from the base of a major ascending channel as technical indicators point north.
The Mexican Peso (MXN) appears to be repeating the depreciation of recent days on Thursday, as market bears – now more confident in the persistence of the evolving bearish trend – push the Peso lower across all its key pairs.
A cocktail of ingredients is contributing to the peso’s decline, including former President Donald Trump’s threat to impose tariffs of up to 300% on Mexican car imports, a report from the International Monetary Fund (IMF) that highlighted a slowdown in economic activity; political risk and a deterioration in consumer confidence data for September.
The Mexican Peso cracks while Donald hits the import piñata
The Mexican peso fell an average of 1.5% on Tuesday, after Donald Trump said in an interview with Bloomberg News that “Mexico is a tremendous challenge for us.” He went on to explain how China was building mega car manufacturing plants on the US-Mexico border, from where it was flooding the US market and harassing US competitors.
Trump promised to stop this practice by reinstating high tariffs and thus allow a regeneration of the American auto industry. Given the importance of the automotive industry to the Mexican economy, as well as the demand for Pesos generated by exports to the US, the former president’s comments weighed on the MXN.
The Mexican peso undermined by the IMF report
The Mexican Peso saw further weakness after the IMF released a report on Tuesday forecasting Gross Domestic Product (GDP) growth would slow to 1.5% by the end of 2024. This comes after the More recent GDP data will show the economy grew 2.1% in the second quarter. It is also below Bank of Mexico’s own forecast of 2.1% for 2024, although it is slightly above the average of responses in Banxico’s September survey of private sector analysts of 1.45%.
The main reasons for the slowdown were given as “binding capacity constraints and a restrictive monetary policy stance”, as well as weaker-than-expected growth in the US and the “unforeseen effects of recent institutional reforms”, according to the report. The latter refers to the controversial judicial reform, which has scared the markets.
Regarding general inflation, the IMF saw that this would fall to the 3.0% target of the Bank of Mexico (Banxico) in 2025, in line with the central bank’s own forecasts but below the average of the Banxico survey of 3.86% (3.80% median).
Banxico prepares to cut and cut rates again before the end of the year
Further downward pressure on the Peso comes from expectations of lower interest rates, which reduces foreign capital flows. The central bank is expected to cut the main interest rate by 50 basis points (bps) (0.50%) before the end of 2024, taking it to 10.00% from 10.50%.
This is reflected in the average forecasts of the Banxico survey, which show that respondents project a fall in the bank’s rate to an average of 10.04% by the end of 2024 (10.00% median) and 8.09% % by the end of 2025 (8.00% median).
Technical Analysis: USD/MXN extends recovery from bottom of ascending channel
USD/MXN extends its recovery from support provided by the base of an ascending channel, as well as the nearby 50-day SMA (red).
USD/MXN Daily Chart
USD/MXN is probably now in a short-term uptrend, which given the technical analysis principle that “the trend is your friend”, has a bias to continue.
The break above the target of 19.83 (October 1 high) will now likely lead to a move towards between 20.10-20.15 and the vicinity of the September 10 high at 20.13.
The MACD line (blue) is rising sharply and has broken above its signal line (red), further indicating a bullish bias.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of the Mexican currency, the Mexican Peso (MXN), and set monetary policy. To do this, its main objective is to maintain low and stable inflation within target levels – at or near its target of 3%, the midpoint of a tolerance band between 2% and 4%.
Banxico’s main tool to guide monetary policy is the setting of interest rates. When inflation is above the target, the bank will try to control it by raising rates, which makes borrowing more expensive for households and businesses and therefore cools 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 the MXN. The rate differential with the Dollar, or the way Banxico is expected to set interest rates compared to the United States Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year and its monetary policy is greatly influenced by the decisions of the United States Federal Reserve (Fed). For this reason, the central bank’s decision-making committee usually meets a week after the Fed. In this way, Banxico reacts and sometimes anticipates the monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did so first in an attempt to decrease the chances of a substantial depreciation of the Mexican Peso (MXN) and avoid capital outflows that could destabilize to the country.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
