- The Mexican peso advances on Friday after the publication of the minutes of the March Banxico meeting.
- The rise in crude oil prices, one of Mexico's main export products, could also be supporting the Peso.
- From a technical point of view, the USD/MXN remains in a long-term bearish trend.
The Mexican Peso (MXN) trades marginally higher against the US Dollar (USD) on Friday, following the publication of the minutes of the March meeting of the Bank of Mexico (Banxico) and amid a rise in crude oil prices , a key export product for Mexico.
The Banxico minutes revealed a reluctance on the part of policymakers to adopt a cycle of easing, including a commitment to lower interest rates in the future, due to the persistence of persistent inflation.
The prospect of interest rates remaining high in Mexico – currently at 11.00% – supports the Mexican Peso, as it encourages greater inflows of foreign capital.
Rising crude oil prices, with Brent topping $90 a barrel on Friday, may have also helped the Mexican peso, given its importance as an export commodity.
The Mexican Peso finds support thanks to Banxico's hardline tone
The Mexican Peso finds support and recovers after the publication of the minutes of the March Banxico meeting.
Although the majority of members voted in favor of cutting interest rates by 0.25% to 11.00%, one monetary policy official, Irene Espinosa, voted against the cut.
Main conclusions:
- In summary, the minutes highlight that inflation, especially in the services sector, remains persistently high and that, therefore, interest rates will have to remain high to return it to the bank's target of 3.0% .
- Members considered that the balance of risks for the trajectory of inflation within the forecast horizon remains biased upwards.
- It was recognized that, although inflation remained persistent, the current environment was less adverse than that of 2022 and the first months of 2023.
- Members noted that long-term inflation expectations drawn from the survey conducted by the Bank of Mexico remain anchored at 3.5%, above the bank's target of 3%.
- It was agreed that monetary policy should remain restrictive and, therefore, promote the convergence of inflation to the 3% target in the forecast horizon.
- Future decisions will depend on the data.
- One member noted that “despite monetary tightening, domestic economic activity continues to show resilience and that demand-related pressures may slow or even reverse the decline in inflation.”
- Furthermore, it was noted that “economic activity continues to show dynamism despite the historic increase in the real interest rate.”
Sensitivity of the Mexican Peso to risk aversion
The Mexican peso is biased to depreciate according to data from the currency derivatives market, according to the comment of a member of Banxico. The MXN is also particularly sensitive to depreciating during periods of high risk aversion, according to Banxico meeting minutes.
“The reduction in the volatility of the exchange rate and in the implicit bias in currency options suggests a lower demand for hedging against a possible depreciation of the Mexican peso, which contrasts with other election years,” said the member, whose name is not known. was made known.
“The lower demand, as well as the positioning observed in the short-term foreign exchange derivatives markets, could magnify a depreciation of the Mexican peso in the event of an episode of high risk aversion, so periods of volatility cannot be ruled out,” the member added.
Technical analysis: USD/MXN in long-term downtrend
USD/MXN is in a long-term downtrend that is showing signs of decreasing pressure. The downtrend began after the pair reached a high of 25.76 in April 2020 – we are now at 16.50.
The pair may be displaying a very large three-wave pattern called Measured Movement. Such patterns are composed of a wave A, B and C, with wave C extending to a similar length to wave A, or a 0.618 Fibonacci ratio of A.
USD/MXN Weekly Chart
If this is the case, the price has almost reached the point where C will equal A, calculated at 15.89.
It has also already surpassed the conservative target for the end of C at the 0.618 Fibonacci extension of A (at 18.24).
Once the pattern is completed, the market usually reverses its trend or undergoes a substantial correction.
The Relative Strength Index (RSI) is sharply converging with the price, a sign that the downtrend could be losing momentum. In 2024, the price has settled below the level of the 2023 lows, but the RSI has not done the same. This lack of correlation between price and momentum is a bullish indication. It could lead to an upward correction.
However, the price has not yet reacted, so bullish expectations remain speculative and unconfirmed.
An actual turnaround in price would be needed to support the view that a turnaround is on the horizon, and that doesn't exist yet.
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.
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.
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.
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.
