The Mexican peso recovers strongly after reaching its lowest level in more than two years

• The Mexican Peso has rebounded after hitting multi-year lows during the US presidential election.
• The Federal Reserve’s November meeting on Thursday could be putting pressure on the US dollar.
• USD/MXN pulls back after reaching its peak, but remains in a solid uptrend overall.

The Mexican Peso (MXN) performs a U-turn that would make an F1 driver proud during the volatility accompanying the US presidential election. On Wednesday, the Peso took a hit as it became increasingly clear that President elect Donald Trump would win the election. His promise to impose tariffs on Mexican imports – between 25% and 300%, depending on the comments made – was the main cause of the strong sale of the MXN.

However, after Trump was actually “crowned Caesar”, the MXN rallied and recovered all of its previous losses. On Thursday, the Mexican Peso continues to marginally outperform its peers in its three most traded pairs: USD/MXN, EUR/MXN and GBP/MXN.

The Mexican peso rebounds from multi-year lows

The Mexican peso jumps from its grave as markets calm after the tumult that accompanied Donald Trump’s victory over his Democratic rival, Kamala Harris, in the 60th US presidential election.

Part of the Peso’s recovery – at least against the US Dollar (USD) – could be attributed to the proximity of the Federal Reserve’s (Fed) November meeting on Thursday, as the Fed is expected to deliver a 25-point cut. (bps) (0.25%) to US interest rates, despite the inflationary prospects of Trumponomy. Lower interest rates are negative for the Dollar as they reduce foreign capital inflows.

30-day fed funds futures prices continue to show a 100% chance of the Fed announcing a 25 bps rate cut and even a small 2.6% chance of a larger 50 bps cut (0 .50%), according to the CME’s FedWatch tool. Interestingly, this was not the case before the election result, when markets saw no chance of a 50 bps cut and a chance of around 5% that the Fed would not cut at all. Furthermore, swap rates are showing a high probability of another 25 bps cut in December. If these predictions continue, the US Dollar is likely to see its upside limited for the time being across all pairs, including against the Mexican Peso.

Another reason for the peso’s recovery could be the realization that many of Trump’s policies, such as his threats to impose tariffs on Mexican imports, may be difficult to implement. The free trade agreement between the United States, Mexico and Canada (USMCA) stipulates that imports of Mexican automobiles to the United States must contain a high percentage of American components, for example. According to the US International Trade Administration49.2% of cars imported from Mexico are made up of parts made in the US. Therefore, adding punitive tariffs would hurt US companies that supply those components. That said, it is also possible that Trump will want to repatriate more of the manufacturing process, ultimately to the detriment of Mexico.

Congressional victory for Republicans could add pressure to the Peso

Trump won the presidency by surpassing the threshold of 270 electoral votes needed to win the race. She currently has 295 electoral votes to Harris’ 226, according to the Associated Press. The Republican Party also won a majority in the United States (US) Senate – 52 out of 44 – and is in the lead to win a majority in the US Congress, with 206 seats to 191 in Democrats so far, although 38 seats remain to be decided.

If Republicans win a majority in Congress, they will have a “complete victory,” and Trump will be able to implement his policies with less friction and delay.

According to forecasts by Mexican financial news website El Financiero, a Republican majority in Congress with Trump as president could lead the Peso to weaken further against the USD. They estimate a band between 21.14 and 22.26 for the USD/MXN in such a scenario. The pair is currently trading at 20.10s.

If the Republicans fail to win a majority in Congress, the pair will likely end up in a range between 19.70 and 21.14, says El Financiero.

Technical Analysis: USD/MXN executes U-turn after peaking

USD/MXN rose to a more than two-year high on Wednesday, but quickly retreated, regaining all previous gains.

USD/MXN 4-hour chart

However, the USD/MXN is in a general uptrend in the short, medium and long term. Furthermore, it is trading in a bullish channel. Given the technical principle that “the trend is your friend”, the odds favor an eventual upward continuation.

The Moving Average Convergence/Divergence (MACD) momentum indicator has crossed below its signal line, which is a bearish signal. However, it remains above its zero line, suggesting that the trend remains bullish.

A break above the high of 20.80 set on Wednesday would likely confirm further gains, with 21.00 as the next key target and resistance level (round number, psychological support).