- The Mexican peso consolidates after temporarily strengthening following the comments of the deputy governor of Banxico.
- On the 4-hour chart, the USD/MXN pair forms a bullish pennant.
- Mexico's economic growth prospects are revised downwards.
The Mexican Peso (MXN) draws a flat line on most charts on Thursday, as traders digest the previous day's gains driven by comments from Banxico Deputy Governor Jonathan Heath.
In its last meeting in March, Banxico decided to cut interest rates from 11.25% to 11.00%. However, Heath said the bank would probably only make “fine adjustments” to interest rates in the future because stubbornly high inflation required them to remain elevated for some time yet..
“It was necessary to ensure that the restrictive monetary stance remained at these levels for as long as necessary until we saw progress in inflation,” Heath said in an interview with Banorte on Wednesday.
Given that maintaining higher interest rates is positive for a currency, because it attracts greater inflows of foreign capital, the Mexican peso appreciated when the news was announced.
The Mexican peso tends to decline in April
Overall, the Mexican Peso has weakened in April, despite Wednesday's rally inspired by Heath's comments. This is mainly because Banxico cut interest rates in March, while most major central banks continue to delay it due to stubbornly high inflation.
The Peso may also have been affected by the recent downward revisions of the growth forecasts for the Mexican economy, from both Banxico and the IMF.
“The forecast for Mexico is revised downwards due to weaker-than-expected results for late 2023 and early 2024, with a contraction in the manufacturing sector,” the IMF said in its latest World Economic Outlook report.
The drop in economic growth is attributed to the reduction of public spending in 2025, in order to reduce the country's budget deficit.
However, it is difficult for a program of radical budget cuts to work politically.
Mexico will hold presidential elections on June 2, the date on which the 628 deputies of the National Assembly will also be elected. According to Columbia Threadneedle Investments, this is likely a two-horse race between the leading center-left candidates, Claudia Scheinbaum and Xochitl Gálvez.
“We believe that, regardless of who wins the elections, Mexico is headed for a fate similar to that of other countries in the region, where governance has weakened and policy proposals have stalled,” says Columbia Threadneedle about the result.
Given that both candidates are left-wing and likely to lead a weak government, expectations of budget tightening seem a bit exaggerated, given the lack of maneuver planned to make unpopular decisions.”
Technical analysis: USD/MXN forms a bullish pennant
The USD/MXN pair (the value of one US Dollar in Mexican pesos) is consolidating into what could be a bullish pennant of sorts on the 4-hour chart.
The movement of the pennant suggests the probability of a further rise if it breaks to the upside.
Since the highs and lows are generally bullish on the chart, the trend is probably bullish in the short term, favoring long positions.
USD/MXN 4-hour chart
The Relative Strength Index (RSI) has retreated from overbought to neutral territory, unleashing bullish potential.
The 50-day SMA support at 16.82 is likely to cap further weakness.
A break above the pennant high around 17.09 would indicate a continuation of the uptrend to the next target, possibly located at 17.17, where the 200-day SMA lies, followed by the resistance of a line of long-term trend and a resistance level around 17.37.
Frequently Asked Questions about the Mexican Peso
What is MXN?
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.
What is Banxico and how does it influence the MXN?
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. Regarding the influence of the central bank on the Mexican peso, a rise in Banxico interest rates tends to strengthen the MXN, while low rates will tend to devalue the local currency.
How does inflation impact the MXN?
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. However, depending on the context, high inflation implies higher interest rates from the Mexican central bank (Banxico), which can lead to strength in the Mexican peso.
How does the Dollar influence the Mexican Peso (MXN)?
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.
How does the Fed's monetary policy affect Mexico?
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. High interest rates from the Fed tend to strengthen the Dollar, so if Banxico kept rates low while the Fed kept them high, an imbalance would occur in the USD/MXN favorable to the USD.
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.
