- The Mexican Peso depreciates as traders price in an ever-increasing risk of Donald Trump winning the US presidential elections.
- Such a victory would likely lead to higher tariffs on foreign imports, negatively impacting Mexico.
- Banxico Governor Victoria Rodríguez Ceja raises the possibility of interest-rate cuts coming down the track
The Mexican Peso (MXN) continues creeping lower in its most traded pairs on Tuesday as concerns mount that former US President Donald Trump could win the US presidential election in November and raise tariffs on Mexican imports. Meanwhile, commentary from Bank of Mexico (Banxico) Governor Victoria Rodríguez Ceja suggests the bank is moving closer to cutting interest rates, another negative factor for MXN.
One US Dollar (USD) buys 18.43 Mexican Pesos at the time of writing, whilst EUR/MXN trades at 19.74, and GBP/MXN at 23.28.
Mexican Peso slides on neighbor danger and Banxico outlook
The Mexican Peso is sliding after the US Supreme Court judged Donald Trump has broad immunity from prosecution over his alleged attempts to undermine the 2020 election results that saw Democrat Joe Biden win by a narrow victory, as per Reuters.
The decision increases the chances Trump could go on and win the US presidential election in November. Such an outcome would probably have a negative impact on trade. Trump has said he will continue with an “America First” agenda, preferencing American-made goods and slapping tariffs on foreign imports. The move would be negative for the Peso given the close trade ties between the two nations.
Further, given the stark political differences between the two countries’ presidents, the likelihood of much goodwill generated between them is extremely low.
Ceja’s dovish twist
In an interview with El Financiero, Banxico Governor Victoria Rodríguez Ceja said, “The Mexican economy is in a solid position to face any external or internal challenges that may arise,” adding that volatility in Mexico’s financial markets after the June election had subsided.
Rodríguez Ceja added that the Peso’s depreciation following the election had influenced Banxico’s Governing Board not to cut interest rates (a weaker Peso drives up imported inflation) at their last meeting. But she added that progress was being made on disinflation and that “allows us to continue discussing downward adjustments in our rate, and I consider that this is what we will be doing in our next monetary policy meetings.”
If Banxico cuts interest rates at its next policy meeting it will probably have a negative impact on the Mexican Peso because lower interest rates attract less foreign capital inflows.
Technical Analysis: USD/MXN plods back up towards June 28 high
USD/MXN manages to continue higher after pulling back from its June 28 swing high at 18.59 – it is now not so far away, trading in the 18.40s.
USD/MXN 4-hour Chart
If USD/MXN rallies and breaks above 18.59 it will make a higher high and is likely to continue up to 18.68 (June 14 high), followed by 19.00 (June 12 high). A break above 19.00 would provide strong confirmation of a resumption of the short-and-intermediate term uptrends.
A move below 18.06 (June 26 low), however, would suggest the short-term downtrend was resuming and probably see a continuation down to 17.87 (June 24 low).
The direction of the long-term trend remains in doubt.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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