The Mexican Peso continues to rise as carry flows support it

• The Mexican peso is rising after the release of broadly inflationary data suggesting interest rates could remain elevated.
• Relatively high interest rates in Mexico, at 11.00%, are attracting foreign capital inflows, supporting the MXN.
• USD/MXN has broken below the key low of June 24 at 17.87.

The Mexican Peso (MXN) continues to appreciate against its key peers on Wednesday following the release of Mexican macroeconomic data on Tuesday that showed continued signs of inflationary pressures in the economy.

A generally beneficial context due to carry flows is further supporting the Peso due to the attractiveness for foreign investors of the relatively high interest rates offered in Mexico (11.00%).

A carry trade is a trade in which investors borrow in a currency where interest rates are low (such as the Yen) and deposit the money in a currency where interest rates are high (such as the MXN). The difference between the interest payments on the loan and the interest paid on the deposit (or bond) generates the profit, all else being equal.

At the time of writing, one US Dollar (USD) buys 17.81 Mexican Pesos, EUR/MXN is trading at 19.27, and GBP/MXN is trading at 22.81.

Mexican Peso Recovering on Inflation Data

The Mexican Peso is recovering as investors reflect on recent macroeconomic data that showed an overall rise in inflation in Mexico in June.

Mexico’s overall inflation rate came in at 0.38% on a monthly basis, exceeding the 0.24% expected by economists and higher than the negative 0.19% in May, according to INEGI data.

June’s core inflation, which excludes volatile food and energy components, came in at 0.22%, below the 0.24% estimated by economists but above the 0.17% in May.

The 12-month inflation rate in June, meanwhile, came in at 4.98%, which was higher than the 4.84% expected by economists and the previous 4.69%.

The slower rise in core inflation could be critical in terms of the outlook for interest rates in Mexico, according to Capital Economics’ investor advisory service.

“Core inflation eased last month. While there is still a lot of uncertainty surrounding the upcoming rate decision in August, we believe that the easing of underlying price pressures, coupled with the weak activity data series and the rebound of the Peso, leave open the possibility of a rate cut in August,” says Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics.

Assuming Banxico goes ahead and cuts interest rates in August, this could have a negative impact on the Peso.

Technical Analysis: USD/MXN breaks key low from June 24

USD/MXN breaks below the key line of the June 24 low at 17.87.

USD/MXN Daily Chart

The breakout is so far on an intraday basis. A decisive break below 17.87 would reconfirm the bearish bias, with the next target at 17.50 (50-day Simple Moving Average).

A decisive breakout would be one accompanied by a long red candle closing near its low or three red candles in a row breaking below the level.

As things stand, the short-term trend is bearish, and the adage “the trend is your friend” suggests that the odds favor a downside extension.

The direction of medium- and long-term trends, meanwhile, remains in doubt.