Mexican Peso plummets as risk aversion and strong US Retail Sales boosts USD

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On Monday, the Mexican Peso weakened against the US Dollar, influenced by robust economic figures from the US and a rise in US Treasury yields. March’s Retail Sales were impressive, supporting the US Dollar’s upward momentum and setting it on course to revisit the peak levels of November 2023, as reflected in the US Dollar Index (DXY). Currently, the USD/MXN is trading at 16.71, marking a 0.54% increase.

Given the sparse economic agenda in Mexico, USD/MXN traders are turning their attention to the dynamics of the US Dollar and the general mood of the market. Mexico’s next important economic announcement, the Retail Sales report, is expected on April 19, 2024.

The US Retail Sales for March exceeded projections, signaling that American consumers are maintaining their spending habits despite the higher interest rates implemented by the US Federal Reserve (Fed). Notably, the control group sales, which are integral to the Gross Domestic Product (GDP) calculation, saw a significant surge, hinting at a potential robust economic expansion in the first quarter of 2024.

The Atlanta GDP Now model’s latest update, dated April 10, 2024, estimates a 2.4% growth for the US economy in Q1 2024. The model is set for an update later today.

Key market developments affecting the Mexican Peso include:

  • The US Retail Sales for March rose by 0.7% month-over-month, surpassing the 0.4% forecast. This represents a 2.1% increase for Q1 2024 compared to the same period last year, showcasing consumer resilience.
  • The control group’s Retail Sales leaped from 0.3% in February to 1.1% month-over-month in March, significantly outperforming the anticipated 0.4% growth.
  • Geopolitical tensions in the Middle East are likely to impact the Mexican currency negatively. USD/MXN traders should be cognizant that any intensification of these tensions could lead to a shift away from the Mexican Peso in favor of the US Dollar.
  • Post-release of the US data, Treasury yields experienced a surge of over 10 basis points across the mid and long segments of the yield curve. This development supports the US Dollar, which has seen a modest increase of 0.09% to 106.17 on the DXY.
  • John Williams, President of the New York Fed, anticipates that rate cuts may commence this year. He views the current policy as restrictive and believes that solid economic fundamentals are fueling consumer expenditure.
  • Futures data from the Chicago Board of Trade (CBOT) indicate that traders are predicting the federal funds rate to settle at 4.975% by the end of 2024.

The USD/MXN daily chart suggests a neutral stance for the currency pair, having closed near the 2023 low of 16.62. However, downside risks persist, with the recent cycle high of 16.94 emerging on March 19. Should this level be surpassed, the pair’s outlook could shift to a neutral-bullish stance.

Looking upwards, the initial resistance is identified at the April 12 high of 16.74. Crossing this threshold would bring the 50-day Simple Moving Average (SMA) at 16.78 into play, followed by the 100-day SMA at 16.97, and eventually challenging the 17.00 mark. Conversely, if the USD/MXN falls below 16.62, the next level to watch would be the April 12 low of 16.40.

 Mexican Peso FAQs

What Drives the Mexican Peso?

The Mexican Peso (MXN) stands out as the most traded currency among its Latin American counterparts. Its value is influenced by several key factors:

1. Mexican Economy Performance: The overall health and growth of the Mexican economy play a significant role. High economic growth, low unemployment, and strong confidence levels contribute positively to the MXN.

2. Banxico’s Decisions: The Bank of Mexico (Banxico), Mexico’s central bank, aims to maintain inflation at low and stable levels (around 3%, within a tolerance band of 2% to 4%). Banxico adjusts interest rates accordingly. Higher interest rates attract investors, making the MXN more appealing, while lower rates tend to weaken it.

3. Foreign Investment: The amount of foreign investment in Mexico impacts the Peso. A favorable investment climate attracts capital inflows, supporting the currency.

4. Remittances: Remittances sent by Mexicans living abroad, especially in the United States, contribute to the Peso’s value.

5. Geopolitical Trends: Geopolitical developments, such as nearshoring (companies relocating manufacturing closer to home), can act as catalysts for the Mexican currency. Mexico’s role as a key manufacturing hub in the Americas also influences the Peso.

6. Oil Prices: As a significant oil exporter, Mexico’s currency is sensitive to fluctuations in global oil prices.

Banxico’s Impact on the Peso

Banxico’s primary goal is inflation control. When inflation rises, Banxico may raise interest rates to curb it. Higher rates attract investment, benefiting the Peso. Conversely, lower rates weaken the currency.

Economic Data and MXN Valuation

Macroeconomic data releases provide insights into the economy’s health. A robust Mexican economy, coupled with low unemployment and high confidence, supports the Peso. Strong economic indicators may prompt Banxico to raise interest rates, especially if inflation is elevated. Conversely, weak economic data tends to depreciate the MXN.

Broader Risk Sentiment

As an emerging-market currency, the MXN thrives during risk-on periods when investors perceive lower market risks. However, during market turbulence or uncertainty, investors seek safer assets, weakening the Peso.

Please note that this information is for informational purposes only and should not be considered investment advice. Always conduct thorough research before making any financial decisions. Investing involves risks, including the potential loss of principal.

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By Christian Borjon Valencia

Source: FX Street