The Mexican Peso has been weakening for four consecutive days, with various factors leading traders to sell the currency. These factors include threats of tariffs from former President Donald Trump, a critical report from the International Monetary Fund (IMF), political risks, and weak economic data. As a result, the USD/MXN pair continues to rally from the base of a major rising channel, with technical indicators showing a bullish trend.
Trump’s threat to impose tariffs of up to 300% on Mexican auto imports has caused a significant decline in the Mexican Peso. This threat is due to concerns about China’s impact on the US auto industry, which has led to fears of a downturn in the Mexican economy. The automotive industry is vital to Mexico’s economy, making the Peso vulnerable to changes in trade policies and tariffs.
The IMF report further exacerbated the weakness in the Mexican Peso, predicting a slowdown in GDP growth to 1.5% by the end of 2024. The report cited capacity constraints, tight monetary policy, and weaker-than-expected growth in the US as contributing factors to the economic slowdown. Additionally, the report mentioned concerns about recent institutional reforms affecting economic stability.
Expectations of lower interest rates from the Bank of Mexico (Banxico) have also put pressure on the Peso. The central bank is projected to cut interest rates by 0.50% before the end of 2024, with further cuts expected in 2025. Lower interest rates can deter foreign capital inflows, affecting the value of the Peso in the foreign exchange market.
In terms of technical analysis, the USD/MXN pair has shown a recovery from the base of a rising channel, indicating a short-term uptrend. The bullish trend is supported by the Moving Average Convergence Divergence (MACD) line, which has broken above its signal line. The outlook is bullish, with a potential move towards the September high levels.
The Bank of Mexico, also known as Banxico, plays a crucial role in guiding monetary policy and maintaining the value of the Mexican Peso. The central bank uses interest rates as a primary tool to control inflation and stabilize the economy. Banxico’s decisions are influenced by the US Federal Reserve’s monetary policy, with the central bank meeting eight times a year to adjust interest rates accordingly. Anticipating and reacting to changes in US interest rates is essential for Banxico to manage capital flows and stabilize the Peso.
