Mexican Peso trades mixed as political risks offset support from monetary policy, trade disputes
- The Mexican Peso trades mixed with multiple influences impacting its valuation.
- The political risk from planned changes to the constitution that critics say will compromise the independence of the judiciary weighs.
- News of Canadian tariffs on Chinese EVs and Mexican monetary policy support MXN.
The Mexican Peso (MXN) trades mixed on Tuesday during the European session after weakening over one percent in its most-traded pairs on the previous day.
The Peso is probably gaining mild support after an interview with the Bank of Mexico (Banxico) Deputy Governor Galia Borja, in which she said interest rates might remain higher for longer. The expectation that rates might remain elevated is positive for the Peso as it is likely to increase foreign capital inflows.
The Mexican Peso may also be gaining relief from the news of Canada’s decision to increase tariffs on Chinese electric vehicle (EV) and steel imports, by 100% and 25%, respectively. This may benefit Mexico in a roundabout way because of its existing role as an intermediary manufacturer of Chinese EVs destined for the North American market and the free-trade agreement it has with Canada, according to Bloomberg News.
At the time of writing, one US Dollar (USD) buys 19.35 Mexican Pesos, EUR/MXN trades at 21.62, and GBP/MXN at 25.60.
Mexican Peso impacted by political risk
The Peso’s weakness on Monday was partly due to investors' concerns over the Mexican government’s planned changes to the Mexican constitution, in particular in the way the judiciary is appointed. The newly approved Morena-ruled government wants to make judges elected rather than appointed. Critics say the changes will compromise the independence of the judiciary, undermining justice and democracy.
In an interview with El Economista on Monday, Banxico Deputy Governor Galia Borja said that, despite the bank making cuts in March and August, this does not imply the abandonment of restrictive policy. The “cuts in March and August do not mean that we are going to the neutral or accommodative territory. That will take some time. So, from now on, there will still be another period in which the restrictive monetary stance will continue,” said Borja.
Cooler-than-expected Mexican inflation data for August, weaker retail sales in July and carry trade flows out of the Mexican Peso might have been other background factors weighing on the currency at the start of the week.
Technical Analysis: USD/MXN trades within a rising channel
USD/MXN is consolidating in a broad uptrend within a rising channel. The established uptrend overall favors longs over shorts.
More recently, the pair has been oscillating within a mini-range between 19.52 and 19.01. It may well fall temporarily to close the gap that opened on August 26 between 19.11 and 19.15. However, the general direction of the trend is up and suggests an eventual ascent towards the channel highs at roughly 20.50.
USD/MXN 4-hour Chart
A break above the 19.53 swing high would provide additional confirmation of the continuation of the up leg towards the channel highs.
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.