The Mexican Peso is showing strength as risk appetite improves, particularly in key pairs on Wednesday. The positive market sentiment is driven by European equities trading higher and the belief that the US Federal Reserve will be able to lower interest rates without causing disruptions to the economy. Mixed US data releases have helped allay concerns about a hard landing for the US economy, with Consumer Confidence in August and US Durable Goods Orders in July coming in higher than expected.
However, the Mexican Peso is facing pressure from political factors, specifically related to proposed reforms by the new Morena-led government for the Mexican judiciary. Critics of the reforms argue that they could undermine justice, democracy, and investor confidence in Mexico. The disagreement over the reforms has led to public demonstrations in Mexico City and a breakdown in diplomatic relations with the US and Canada. This political risk could negatively impact the Mexican Peso, especially if former-President Donald Trump wins the presidential election.
Despite these challenges, Mexico could potentially benefit from an escalating trade war between North America and China, as Canada has decided to increase tariffs on Chinese electric vehicle (EV) and steel imports. Mexico’s role as an intermediary manufacturer of Chinese EVs could be advantageous, as these products are not subject to punitive tariffs due to the existing free-trade agreement between the US, Canada, and Mexico.
In terms of technical analysis, the USD/MXN pair is moving up within a rising channel, with an established uptrend favoring long positions over short ones. The pair has broken above a key high, signaling potential further gains towards the upper channel line. The Relative Strength Index (RSI) has recently exited overbought territory, indicating a possible pullback within the uptrend, with support expected at previous resistance turned support levels.
Overall, the Mexican Peso’s performance is influenced by a combination of market sentiment, political risks, and trade dynamics with North America and China. While the currency faces challenges from ongoing political debates and tensions, it also has the potential to benefit from trade developments in the region. Monitoring key economic indicators and technical analysis can provide insights into the future performance of the Mexican Peso against major currencies like the US Dollar and Euro.
