Trump factor causes Mexican Peso to weaken against USD

Recent Article: Mexican Peso is unchanged against US Dollar following mixed US NFP report

Mexican Peso retraces earlier gains against US Dollar, weakening against European counterparts and recovering some gains earlier seen against poor US data that initially affected USD negatively; however, with an increasing likelihood of Donald Trump presidency come renewed prospects and rebound.
As political risk in Europe subsides, pressure off of both currencies such as Euro and Pound recedes.

On Friday, the Mexican Peso (MXN) reversed earlier gains and traded lower against its most traded pairs due to mixed reactions following US Nonfarm Payrolls report and “Trump Put,” pushing US Treasuries lower while still keeping US Dollar bid. Gains for Europe-based Mexican Peso were moderated due to reduced political risk associated with elections suggesting moderates have retained power despite growing far-right elements in political scene.

MXN gains were reinforced by remarks made by Jonathan Heath, Deputy Governor of Bank of Mexico (Banxico). Mr Heath expressed doubts regarding interest rate declines occurring soon in Mexico compared with Federal Reserve Chairman Jerome Powell who expressed doubt.

At this writing, one US Dollar (USD) buys 18.17 Mexican Pesos; EUR/MXN trades at 19.65; while GBP/MXN stands at 23.23.

Mexican Peso Reverses Early Gains against USD

On Friday morning during European trading hours, Mexican Peso rose against US Dollar due to traders digesting recent weak US economic data that may impact interest rate changes going forward – one key driver of FX flows.

Initial Jobless Claims and Continuing Claims both increased rapidly in the week ending June 22, reaching their highest total since November 2021.

Services sector had recently seen signs of expansion; however, in June saw its performance slow as ISM Services Purchasing Managers Index (PMI) data registered at 48.8 — below 50 and at its lowest since 2020.

This has weakening USD significantly as falling inflation expectations lead the Federal Reserve to reduce interest rates more aggressively; lower interest rates reduce capital flows into Dollar assets from abroad and are therefore detrimental for its value.

NFP data temporarily caused USD to weaken before experiencing a rebound.

On Friday, the US Nonfarm Payrolls (NFP) report further devalued the US Dollar due to an unexpectedly higher unemployment rate of 4.1% – unanticipated by economists – from 4.0% previously. Economists had not anticipated such an outcome and it may lead the Federal Reserve to reduce interest rates to stimulate hiring by cutting interest rates further.

Overall, however, the NFP report was mixed. According to its headline Nonfarm Payrolls result, which showed 206K new employees joining the workforce in June — exceeding consensus expectations by 13K — Average Hourly Earnings — which can affect inflationary pressures and interest rate policy via inflationary pressures — were unchanged on a monthly basis at 0.3% growth as predicted and year-over-year wage inflation declined from 4.1% (predicted earlier) down to 3.9% as per data from US Bureau of Labor Statistics.

Trump Put assists US yields and the USD in recovering.

Mexican Peso was unable to maintain its gains against the US Dollar during US session as traders returned from July 4 holiday with expectations that President Donald Trump may put more strain on bond markets by cutting taxes while borrowing to cover shortfall.

Former President Donald Trump appears to have edged out former Vice-President Joe Biden during the recent televised debate in Atlanta, when Biden appeared disoriented at times and struggled to provide coherent responses to some questions posed to him by moderator Chuck Todd. Critics attribute Biden’s performance in part to age; some even suggest he might no longer be fit for office altogether. Coupled with recent Supreme Court ruling giving Trump partial immunity against charges related to Capitol Hill storming following election loss 2020 has increased betting that Trump might triumph come November elections this time round.

Some economists are forecasting a Trump presidency will result in lower taxes yet higher spending, worsening America’s budget deficits and public debt even further.

Yields have surged following President Joe Biden’s poor showing against Republican rival Donald Trump during the first presidential debate last month, heightening speculation of another win by Trump when voters go to polls on Nov 5. “After this debate, yields rose significantly: around six points on average to reach 4.34%”, reports Davide Barbuscia from Reuters US Investment Correspondent.

“Some investors expect higher inflation under Donald Trump due to his trade and economic policies such as higher tariffs on imports, profligate government spending with lower tax revenue collection resulting in increasing fiscal deficits and U.S. debt levels,” according to Heard.

Mexican Peso’s volatility remains subdued relative to European counterparts.

Due to diminishing political risk, the Mexican Peso (MXN) has seen gradual depreciation against both Euro (EUR) and Pound Sterling (GBP). It now seems likely that far-right French National Rally party will fail to secure enough seats at Sunday’s second round French elections for a majority vote and thus support for Euro is on an upward trend.

As Labour party’s victory in Thursday’s general election boosted GBP slightly, analysts expect some post-election strengthening. Reasons include improved political climate stability as well as better growth forecasts as key contributors.

Technical Analysis: USD/MXN continues its slide to key low levels

USD/MXN continues its downward slide towards its key June 24 swing low of 17.87. While it could enter a sideways trend at any time now, too early can’t say for certain at this stage.

USD/MXN 4-hour Chart
Once we reach the June 24 low point, there’s a possibility that once achieved, this pair could start consolidating. A break above 17.87 could indicate sideways movement before any decisive break below 17.87 could signal new downtrend formation with 17.50 (50-day Simple Moving Average).

Return of 18.59 would indicate an upswing towards 18.68 (June 14 high), then 19.00 (June 12 high), before breaking above it would provide strong confirmation of short and intermediate term uptrends resumption.

Longer-term trends remain unclear.

Banxico FAQs
The Bank of Mexico, also referred to as Banxico, serves as Mexico’s central bank and strives to protect and uphold the value of Mexico’s currency – the Mexican Peso (MXN) – through setting its monetary policy and maintaining low and stable inflation within target levels – that of between 2%-4% tolerance range (i.e. keeping inflation within an acceptable level i.e. below or close to target of 3%) which serves as its goal.

Banxico uses interest rate settings as its main method to implement its monetary policy, targeting inflation when necessary by raising rates – increasing borrowing costs for both households and businesses, ultimately slowing economic activity. Increased rates typically benefit Mexico as higher yields make the country more appealing to investors while lower interest rates often weaken it; any differential between US Federal Reserve (Fed) interest rate setting expectations and those expected of Banxico rates is key here.

Banxico meets eight times every year and its monetary policy decisions are heavily impacted by decisions of the US Federal Reserve (Fed). As a result, its decision-making committee usually convenes within one week after Fed meetings so as to react or even anticipate policy measures from them; for instance after Covid-19 Pandemic outbreak triggered rates increase prior to Fed in order to minimize chances of substantial devaluation and prevent capital outflows that might destabilise Mexico.