• Wed. May 22nd, 2024

Even Though It Has Recovered From Risk Aversion Lows, the Mexican Peso Continues to Remain Weak

Leon Kramer

ByLeon Kramer

Apr 20, 2024
Even Though It Has Recovered From Risk Aversion Lows, the Mexican Peso Continues to Remain Weak

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  • The Mexican Peso has experienced a 0.50% decline in value against the US Dollar due to global safe-haven flows prompted by tensions in the Middle East.
  • Banxico’s Deputy Governor, Jonathan Heath, suggests that there may be a possibility of interest rate stability in the near future. He foresees the likelihood of 2-4 reductions in the upcoming policy meetings.
  • Heath proposes a more equitable exchange rate of approximately 17.00, alleviating concerns about excessive Peso instability.

The Mexican Peso continues to face pressure as it experienced a significant drop of nearly 5% against the US Dollar in the overnight session for North American traders. Reports of an Israeli strike on Iran in response to the April 13 attack caused a surge in demand for safe-haven assets, negatively impacting the Mexican currency.

Nevertheless, the Peso received a significant boost from Jonathan Heath, the Deputy Governor of the Bank of Mexico (Banxico) ‘s assertive remarks. Despite this positive development, the currency continues to trade in negative territory. The USD/MXN is currently trading at 17.16, showing a 0.50% increase.

As reported by Reuters, Israel retaliated against Iran following the drone attacks on April 13. There were accounts of detonations in the Iranian city of Isfahan, which accommodates a military facility. Nevertheless, Iran is currently downplaying the extent of the damage, suggesting that an army retaliation may not be on the horizon.

During an interview with Reuters, Jonathan Heath, the Deputy Governor of Banxico, indicated that interest rates would be maintained at elevated levels for an extended period. This guidance suggests that the Mexican central bank is likely to hold off on making any changes during its upcoming meeting in May. Based on the data, he anticipates 2 to 4 reductions out of the institution’s six remaining monetary policy decisions.

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Heath mentioned that the USD/MXN exchange rate at 16.30 appeared to be excessively robust, indicating that a “more sustainable rate” would be for the USD/MXN rates to hover around 17.00. He mentioned that the Peso might have an adverse reaction to the US election, although not to the same extent as it did in 2016.

During a recent statement, Galia Borja, Deputy Governor of the Bank of Mexico (Banxico), expressed the view that there is still a considerable amount of work to be done in order to reduce inflation and progress towards Banxico’s target of 3.0%.

On the other side of the border, the economic agenda in the United States (US) included a speech by Chicago Federal Reserve President Austan Goolsbee, who adopted a more balanced position after previously leaning towards a more accommodative stance.

Even Though It Has Recovered From Risk Aversion Lows, the Mexican Peso Continues to Remain Weak

  • Retail sales in Mexico increased modestly by 0.4% month-on-month in February, showing a positive growth of 3.0% over the year. The performance showed a positive trend compared to the previous month when sales declined by -0.6% MoM and -0.8% YoY.
  • According to an initial report from INEGI, it appears that Mexico’s economy experienced a year-on-year growth of 2.1% in March, based on preliminary estimates.
  • According to Jonathan Heath, deputy governor of the Bank of Mexico (Banxico), caution should be exercised before considering normalizing monetary policy, as inflation remains persistently high. He emphasized the importance of maintaining a tight monetary policy for an extended period.
  • The International Monetary Fund (IMF) has revised Mexico’s economic growth forecasts. The growth expectation for 2024 has been lowered from 2.7% to 2.4%, while the forecast for 2025 has been adjusted from 1.5% to 1.4%. The IMF credited the decrease in the 2025 prediction to projected fiscal contraction by the new government, which is anticipated to undo the fiscal expansion that is fueling the current economic growth. This modification will require reducing the current expenditure strategies.
  • According to Chicago Fed President Goolsbee, it is prudent to exercise patience and seek further clarity before considering any adjustments to policy. He also emphasized that the current monetary policy, which is aimed at maintaining restraint, is suitable.
  • During a recent statement, Atlanta Fed President Raphael Bostic indicated that the central bank is unlikely to lower interest rates in 2024. Parroting his remarks was John Williams of the New York Fed, who stated that the current monetary policy is in a favorable position, suggesting that there is no urgency to lower interest rates.
  • According to data from the Chicago Board of Trade (CBOT), traders anticipate that the Fed funds rate will conclude 2024 at 4.995%, a slight decrease from the previous day’s rate of 5%.

Mexican Peso Falls as Buyers of USD/Mxn Reclaim the 200-day Simple Moving Average

After the recent developments, the USD/MXN has taken on a more positive outlook, surpassing the 200-day Simple Moving Average (SMA) at 17.16. The SMA is an essential level of support and resistance. Traders utilize this level as a dynamic point of resistance or support that illustrates an asset’s overall trend.

Nonetheless, those purchasing USD/MXN still face some challenges. In order to make progress, they must surpass the high point of January 23 at 17.38 on a daily basis. This achievement would then reveal the next level at 17.550. There is potential for further gains at 17.56, which was the swing high on December 5, 2023, before reaching the 18.00 level.

Alternatively, should the USD/MXN drop below the 200-day SMA, anticipate a pullback towards the 100-day SMA at 17.08. If sellers manage to exceed this level, they have the potential to push the exchange rate towards the 17.00 mark.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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