On Thursday, the Mexican peso dipped approximately 0.30% as investors became more cautious, reacting to rising energy prices stemming from heightened conflict in the Middle East. Concurrently, a string of positive economic reports from the United States could potentially reverse the current trend, opening the possibility for the dollar to recover. As of now, USD/MXN trades at 17.43, having previously hit a daily low of 17.37.
USD/MXN rises due to oil price surge and positive US economic data
The ongoing tensions between the United States and Iran have fueled worries that a protracted conflict could ignite a new inflation wave due to surging oil costs. Consequently, the U.S. dollar strengthened, supported by rising yields on U.S. Treasuries, particularly the 10-year note, which increased by 2 basis points to 4.569%.
This shift pushed the U.S. dollar index (DXY) up by 0.27% to 100.76, which gauges the dollar against six other currencies.
In positive U.S. economic news, retail sales grew by 0.2% month-on-month in June, showing a decrease from May’s 1% rise, primarily influenced by higher gasoline prices. Core retail sales, a GDP factor, also moderated to 0.5% from 0.8%, aligning with forecasts. Additionally, the week ending July 11 saw 208,000 new unemployment claims, which is lower than the anticipated 217,000.
Fed officials adopt a hawkish tone
Officials from the Federal Reserve, including regional presidents Laurie Logan and Jeffrey Schmidt, have expressed a more aggressive stance. Mr. Logan suggested a modest increase in interest rates to balance economic prospects and risks. Meanwhile, Mr. Schmidt acknowledged that while the job market appears stable, ongoing inflation concerns remain for various goods and services.
Progress in U.S.-Mexico trade discussions
Despite the absence of economic documents from Mexico, negotiations between the U.S. and Mexico continue to advance.
U.S. Trade Representative Jamison Greer noted that formal negotiations with Mexico are progressing well. He remarked, “We have a good relationship with Mexico. They’re quite pragmatic,” but he also pointed out the significant trade deficit with Mexico as a serious issue.
Next week, officials from both countries will convene in Mexico City for the third round of USMCA trade negotiations. A favorable outcome could further weaken the Mexican peso, as interest rate differentials might decrease.
The Bank of Mexico (Banxico) is projected to maintain its interest rate at 6.50%, while the swap market anticipates a 25 basis point hike from the Fed, which would reduce the interest rate spread to 250 basis points.
USD/MXN Price Prediction: Technical Analysis
According to the daily outlook, USD/MXN is presently at 17.4309, just above a simple moving average (SMA) cluster around 17.3786, acting as short-term support and promoting a generally calm tone. However, the pair is still restricted by a descending resistance trend line originating from 18.1651, with its latest high at 17.5456 representing an initial barrier to upward movement. The Relative Strength Index (14) near 49 indicates a largely neutral momentum, suggesting a consolidation phase rather than a breakout.
On the upside, initial resistance is noted at the recent trend line reaction near 17.5456, with the last resisted closing level around 18.1200, and further ahead, a higher structural peak linked to a long-term downtrend. On the downside, the multi-period SMA zone at 17.3786 offers immediate support; as long as USD/MXN stays above the lower limit of this moving average, any downward movement is expected to be limited within the overall range.
Frequently Asked Questions about the Mexican Peso
The Mexican Peso (MXN) is the most commonly traded currency in Latin America. Its value largely depends on the performance of Mexico’s economy, the central bank’s policies, foreign investment levels, and even remittances from Mexicans abroad, especially from the U.S. Geopolitical events can also impact the peso. For instance, the trend of nearshoring—companies relocating manufacturing closer to home—has been a factor in the peso’s strength, as Mexico is viewed as a major manufacturing hub in the Americas. Oil prices play a significant role as well, given Mexico’s status as a major goods exporter.
The Central Bank of Mexico, or Banxico, aims to maintain inflation at a low and stable level, targeting around 3%. To achieve this, it adjusts interest rates accordingly. If inflation rises, Banxico might increase rates to cool demand and borrowing. Higher rates generally benefit the peso, making it more attractive to investors, while lower rates tend to lead to its depreciation.
Releasing macroeconomic data is crucial for assessing the economy and can significantly affect the peso’s value. A strong economy characterized by high growth, low unemployment, and strong consumer confidence is favorable for the peso. This environment attracts foreign investment and may prompt Banxico to raise interest rates, especially if linked with rising inflation. Conversely, weak economic indicators could lead to a depreciation of the peso.
As an emerging market currency, the Mexican peso tends to appreciate during risk-on periods—when investors feel more secure and take on riskier investments. However, in times of turmoil and economic uncertainty, it usually depreciates as investors shift away from riskier assets to safer options.
