Mexican Peso weakens on investor fears over new administration

June 7, 2024 11:53 am

  • The Mexican Peso declined on Thursday as a result of investor concerns regarding reforms the government wants to push through. 
  • Critics say they are anti-democratic and market-negative. 
  • USD/MXN renews its uptrend after a steep correction midweek.  

The Mexican Peso (MXN) pauses its decline on Friday after another bout of selling since the beginning of the week, sparked by investor fears regarding the market impact of radical changes to the Mexican constitution proposed by the country’s recently-re-elected left-wing administration.  

USD/MXN is exchanging hands at 17.88 at the time of writing, EUR/MXN is trading at 19.47 and GBP/MXN at 22.86.

Mexican Peso weakens again due to politics 

The Mexican Peso’s renewed bout of weakness started following comments from the head of the ruling Morean party in Congress, Ignacio Mier, who said on Thursday that he would be submitting controversial constitutional reforms to a discussion and vote in Congress. The reforms were proposed by outgoing president Andres Manuel Lopez Obrador (AMLO) back in February. Critics say they are anti-democratic and market-unfriendly. 

Sunday’s elections saw AMLO’s protege, President-elect Claudia Sheinbaum and her Morena party win a landslide victory. Although not all the votes have been counted yet, it looks like the party has probably won a supermajority (over two-thirds) in the Congress and also possibly in the Senate. If so, this would give it the power to push through AMLO’s radical reforms. 

The Peso lost 5% on Monday and Tuesday as early estimates showed the scale of the victory. Midweek it found a floor and recovered after the Mexican Finance Minister tried to reassure investors the government would continue to act with fiscal discipline and be pro-investment. Mier’s comments late Thursday, however, renewed concerns about the proposed constitutional changes.

On the data front, meanwhile, Mexican Auto Exports rose 13.0% year-over-year in May, while Auto Production rose 4.9% for the same period; this was lower than April’s 14.4% for exports and 21.7% for production, according to data from INEGI.

Technical Analysis: USD/MXN resumes uptrend

USD/MXN – the value of one US Dollar in Mexican Pesos – resumed its uptrend bias on Thursday and is currently trading back up in the 17.80s. This comes after a decline to a low in the 17.40s on Wednesday. 

USD/MXN 4-hour Chart 

The recovery suggests the short and intermediate-term trends are still bullish, and given that “the trend is your friend”, the odds favor a continuation higher. The fact that bulls have managed to push the price above 17.54 (the last higher low) and another key level at 17.72 marks key victories and indicates lessening bearish pressure.

The pair is now close to touching resistance at 18.20, the June 4 high. A break above that level would add confirmation of a continuation higher to the next target at 18.49 (October 2023 high).

The long-term trend is probably still bearish, suggesting moderate background risks continue. 

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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