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Mexican Peso extends rally after Banxico official’s comments

  • The Mexican Peso extends its uptrend after comments from the Deputy Governor of the Bank of Mexico. 
  • Irene Espinosa said she advocated for interest rates remaining high as inflation continued to be a problem.
  • USD/MXN forms a bearish channel while it continues to descend. 

The Mexican Peso (MXN) edges higher on at the start of the new week, continuing the steep rally witnessed in most MXN pairs on Friday, after the Deputy Governor of the Bank of Mexico (Banxico), Irene Espinosa, said she thought the Banxico should keep interest rates at their current high level (11.0%) as the battle with inflation was not yet over. 

Her comments were positive for the Mexican Peso as higher interest rates attract more foreign capital inflows. They also contrast with the outlook for many of the Peso’s major peers where earlier interest rate cuts are now either expected or likely.

At the time of writing, USD/MXN is trading at 16.60, EUR/MXN at 18.05 and GBP/MXN at 21.07. 

Mexican Peso boosted by Espinosa comments 

The Mexican Peso continued its short-term uptrend in most pairs on Friday after Irene Espinosa said she did not see any “urgency in cutting interest rates”, according to Milenio.com. She further added that the Banxico’s decision to cut interest rates in March had been “premature”, according to Christian Borjan Valencia, Editor at FXStreet. 

Espinosa’s views are consistent with her stance at the Banxico March meeting when she was the only member of the Banxico board not to vote for the decision to cut interest rates by 0.25% from 11.25%. They also contrast with the views of the Governor of the Banxico Victoria Rodriguez Ceja, according to Milenio.com. 

Divergence with major central banks

Espinosa’s stance diverges from the market’s expectations of monetary policy for the central banks of the Peso’s key counterparts – the US Dollar (USD), Euro (EUR) and Pound (GBP). 

Officials at the European Central Bank (ECB) have as good as committed to implementing interest rates cut in June; the Bank of England (BoE) is widely expected to cut rates in August; and whilst officials at the Federal Reserve (Fed) have not been as vocal about wanting to cut interest rates amid persistent inflation, recent lower-than-expected CPI data as well as flat Retail Sales for April, increased bets by futures traders of the Fed cutting rates in September, which currently stand at around 65%, according to the CME FedWatch tool. 

On the economic-data front, the Mexican Peso could experience some volatility after the release of Mexican Retail Sales for March at 12:00 GMT on Monday. 

Technical Analysis: USD/MXN continues descent

USD/MXN – the value of one US Dollar in Mexican Pesos – edges lower on Monday after the steep sell-off at the end of the previous week, as traders continue exerting bearish pressure on the pair. 

USD/MXN 4-hour Chart 

The USD/MXN is falling in a short-term downtrend within a descending channel that favors short bets over longs. 

The next downside target is the conservative price objective calculated for the breakout of the mid-April to May range. This is situated at 16.54, the 0.618 Fibonacci ratio of the range’s height extrapolated lower. Further bearishness could even see USD/MXN reach 16.34, the full height of the range extrapolated lower. 

The pair is meeting support at the lower base of the channel and could pull back before its next descent. 

The Relative Strength Index (RSI) momentum indicator is signaling oversold conditions, which indicates traders should not add to their short positions. If the RSI exits oversold and returns to neutral territory above 30, it would be a signal to close those positions as a correction is probably underway. Once the correction ends, however, the descending channel is expected to continue taking prices lower. 

Given the medium and long-term trends are also bearish, the odds further favor more downside. 

Mexican Peso FAQs

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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 MXN.

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.