Mexican Peso recovery falters as investors shrug off Banxico’s intervention warning
14.06.2024, 09:54

Mexican Peso recovery falters as investors shrug off Banxico’s intervention warning

  • The Mexican Peso briefly recovered on Thursday after the President of the Banxico warned she will prop up the Peso if volatility persists. 
  • The recovery falters on Friday, however, as traders continue beating MXN lower following the outcome of the June elections. 
  • USD/MXN appears to end its correction and resume its bullish trend. 

The Mexican Peso (MXN) trades between half a percent and one percent lower in its most traded pairs on Friday as markets continue to fret about the proposed policies of Mexico’s newly elected left-wing government. The Peso is additionally pressured by a squeeze on overweight long positions that have built up after a multi-year period of appreciation for the Mexican currency.  

At the time of writing, a single US Dollar (USD) buys 18.56 Mexican Pesos, EUR/MXN is trading at 19.87 and GBP/MXN at 23.63.

Mexican Peso temporarily recovers after intervention, then sinks

The Mexican Peso backs and fills on Friday after the previous day’s steep rally, which came on the back of verbal intervention by the President of the Banco de Mexico (Banxico), Victoria Rodriguez Ceja, who said Banxico would step in to prop up the Peso if volatility became too “extreme”.

On Friday, however, traders continue to apply pressure in line with the downturn since the results of the Mexican elections on June 2. These led to a victory for President-elect Claudia Sheinbaum and her left-wing coalition Sigamos Haciendo Historia (SHH). SHH won a supermajority in the Mexican house of deputies and came two seats away in the senate. This will make it easier for incumbent President Andres Manuel Lopez Obrador (AMLO) to push through radical amendments to the constitution that have set markets on edge. 

The raft of 20 proposed amendments and reforms range from rights to higher minimum wages and an increase in state-sector pensions, to the abolition of independent regulators and reforms to the judiciary – particularly the controversial idea of replacing the current system of appointing judges with one that would see them elected by popular vote. 

“The main concerns around these amendments is that (i) there will be an erosion of checks and balances and (ii) they would start to take Mexico down the path of wage indexation, which would clearly undermine Banxico’s efforts to get inflation under control,” Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics told FXStreet

On Wednesday during his daily broadcast to the masses, AMLO hit back at critics of his reforms, saying the current depreciation of the Peso, which has lost 10% of its value since the election, has been driven by “speculators” not “investors” and is part of a conspiracy of the right to “blackmail” the government into ditching the proposed reforms. 

He further argued that the current system of appointing judges was too open to corruption by elites, politicians and organized crime, resulting in a judiciary that was compromised. In comparison his reforms “would make the appointment of judges more democratic, improving the rule of law and actually attracting more not less foreign investment,” he said. AMLO also pointed to the fact that under his administration the Peso had appreciated whereas under all five previous Presidents it had depreciated, sometimes considerably. Critics of AMLO say he is punishing the Supreme court for obstructing some of his reforms. 

The large decline in the Mexican Peso since the June 2 elections could be seen as an overdue correction from overvalued extremes. The Peso has been in a long-term uptrend since April 2020, partly due to the extraordinarily high interest rates set by the Bank of Mexico (Banxico), which have made the currency attractive to carry traders. Carry traders borrow in currencies with low interest rates like the Japanese Yen (Apr circa 0.0% -0.1%) and invest in currencies like the Mexican Peso that offer higher returns (Apr circa 11.00%), pocketing the difference. 

It seems unlikely that the prospect of judicial reforms are primarily to blame for the sudden steep correction in MXN. Rather the elections may have acted as a kind of tinder stick to a bonfire of long positions that had built up in the Peso. 

“Before the election, we’d been arguing for some time that the Peso appeared increasingly overvalued and was vulnerable to a sharp fall – the declines over the past couple of weeks have taken it within touching distance of our long-standing year-end forecast of 19.00 (USD/MXN),” said Tuvey. 

Technical Analysis: USD/MXN probably resumes short-term uptrend 

USD/MXN rebounds after its recent correction on Friday, resuming its short and intermediate term uptrend. 

USD/MXN Daily Chart 

Given “the trend is your friend,” the odds favor a continuation of the uptrend, with the next target potentially situated at 19.22 (March 2023 high).

The Relative Strength Index (RSI) has just exited the overbought zone. However, the correction could still go deeper – although the established uptrend is likely to eventually resume.

The direction of the long-term trend is in doubt after the break above the October 2023 high. Previous to that, it was down.

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.


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