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Mexican peso retreats from overbought extremes ahead of central bank meeting

by xyonent
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  • The Mexican peso recovered after becoming overbought ahead of the central bank meeting.
  • The Mexican central bank is expected to keep interest rates unchanged at 11%, supporting the Mexican peso.
  • The short-term trend for USD/MXN has reversed and is now probably bearish.

The Mexican peso (MXN) fell from highs on Tuesday as traders took profits after a period of concerted gains that reversed nearly half of the post-election declines in the most-traded currency pair.

At the time of writing, one US Dollar (USD) can be purchased for 18.11 Mexican Pesos, EUR/MXN is trading at 19.40, and GBP/MXN is trading at 22.96.

Mexican peso strengthens as inflation remains high

The Mexican peso fell from overbought highs on Tuesday as traders booked profits on long positions following last week’s strong rebound.

Headline Mexican inflation data released on Monday beat expectations and was in line with the Bank of Mexico’s (Banxico) pledge to keep interest rates high to combat high inflation.

Mexico’s mid-June Consumer Price Index (CPI) rose 0.21% month-on-month, beating expectations of a 0.13% increase and a negative result from the previous month. Year-on-year, it rose 4.78%, unchanged from the previous report and beating expectations of a 4.70% increase.

However, the story was different for core prices, which rose 0.17% month-on-month, below analysts’ expectations of a 0.18% increase, but rose 0.17%, higher than the previous month’s 0.15% increase. Annual core prices rose 4.17%, below the consensus estimate of 4.31% and below the previous month’s 4.19% increase.

The Mexican peso surged against the US Dollar (USD) after the release of the CPI data. The figures, which joined earlier better-than-expected retail sales and personal consumption expenditure data, signaled relatively strong Mexican consumer spending despite high borrowing costs.

The June CPI data showed that both core and headline inflation remained above the central bank’s target of 2% to 4%, indicating that the central bank is likely to keep interest rates unchanged at the current 11.00% at its June policy meeting on Thursday.

“The Bank of Mexico meets on Thursday and is expected to keep rates unchanged at 11.0%,” Dr. Win Shin, global head of market strategy at Brown Brothers Harriman (BBH), said in a note on Tuesday. “At its last meeting on May 9, the bank left rates unchanged after kicking off an easing cycle with a 25 basis point rate cut at its March 21 meeting. Recent weakness in MXN is a risk to rising inflation and the bank is likely to remain cautious. The swap curve has adjusted upwards since the May meeting and is now pricing in only 75 basis points of easing over the next 12 months versus 125 basis points at the start of May,” Dr. Shin added.

According to economists at Standard Chartered Bank, the Mexican peso’s post-election depreciation, which could cause a drop of more than 11% in major currency pairs, is likely to lead to imported inflation due to higher prices of imported goods, which will discourage the Mexican central bank from lowering interest rates to support the peso.

“We expect the Bank of Mexico to keep interest rates on hold at its June 27 meeting rather than cut them by 25 basis points amid rising political unrest and a sharp currency collapse due to fiscal uncertainty,” the bank said.

Mexican peso strikes back

The Mexican peso rebounded last week, recovering more than 5.0%, nearly half of its decline following the June 2 election. The recovery gained further momentum on Thursday, June 20, when Prime Minister Claudia Scheinbaum announced her cabinet appointments.

Markets appear to have welcomed the choice of Marcelo Luis Ebrard Casaubon, who served as foreign affairs secretary under President Andrés Manuel López Obrador (AMLO), as economy minister.

Additionally, the Mexican peso is supported by Mexico’s relatively high interest rates (11.00%), making it one of the most attractive currencies to buy in a carry trade, according to Christian Laurens, senior strategist at Rabobank.

A “carry trade” is a type of investment in which an investor borrows a low-interest currency, such as the Japanese Yen (JPY), to buy a high-interest currency, such as the Mexican Peso. The profit is the difference between the interest repayments on the low-interest loan and the profit from the interest on the investment (minus the currency risk).

“The main driver of MXN’s strong performance has been its status as the world’s most attractive carry currency, which remains the case today and will continue to be the case in the coming months,” Lawrence told FXStreet.

This makes it costly for most traders to hold short positions in the Mexican peso for long periods of time, Lawrence explained, making it less likely that a long-term bearish trend will develop.

Technical analysis: USD/MXN short term trend reversal, RSI oversold

USD/MXN briefly dipped below 18.00 but then became oversold and rebounded.

The short term trend has probably reversed and is trending down, and since “the trend is on your side” we can expect further weakness as the decline continues.

USD/MXN 4-hour chart

A break below 17.87 (June 24 low) would indicate a continuation of the short-term downtrend, with a target of 17.71 (June 4 low on the 4-hourly chart), and any further gains would be a continuation of the June 4 swing low of 17.54.

The Relative Strength Index (RSI) is oversold but is attempting to break out of this zone. If successful (which is becoming more likely), it would signal a pullback to the upside. The 100-period simple moving average on the 4-hour chart is at 18.19, which could be the peak level of the correction before it reverses and falls again.

The direction of the long-term and medium-term trend remains in doubt.

Economic indicators

Central Bank Interest Rates

of Bank of Mexico The central bank issues important interest rates that affect the entire range of interest rates that commercial banks, building societies, and other financial institutions charge their depositors and borrowers. Generally speaking, if the central bank is hawkish about the inflation outlook for the economy and raises interest rates, it is positive, or bullish, for the Mexican peso.

read more.

Next release: June 27, 2024 (Thursday) 19:00

frequency: Irregular

consensus: 11%

previous: 11%

sauce: Banxico

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