- The Mexican Peso pulls back after its recent run of gains on the back of fears of global trade becoming fragmented.
- US Dollar recovers against the Peso after data shows the Fed is likely to kick the can of lowering interest rates further down the road.
- USD/MXN stalls in its short-term downtrend, but more downside is still foreseen.
The Mexican Peso (MXN) meets resistance in its upwards climb on Tuesday – and pulls back – possibly due to growing concerns about the fragmentation of international trade that could especially hit export-based emerging-market economies like Mexico.
Against the US Dollar (USD) more specifically, MXN weakens after US data showed heightened US inflation expectations, which are likely to keep interest rates in the US elevated for some time, increasing capital inflows to the Dollar.
USD/MXN is exchanging hands at 16.77, EUR/MXN at 18.11 and GBP/MXN at 21.05, at the time of publication.
Mexican Peso loses upside momentum on geopolitical concerns
The Mexican Peso lost ground on Monday after the International Monetary Fund (IMF) warned global economic growth might lose momentum due to a fragmentation of international trade along geopolitical lines.
In a speech at Stanford Institute for Economic Policy Research, IMF First Deputy Managing Director Gita Gopinath, said: “Countries are reevaluating their trading partners based on economic and national security concerns,” adding that if the trend continued, “we could see a broad retreat from global rules of engagement and, with it, a significant reversal of the gains from economic integration.”
The news comes after the US plans to impose further protectionist policies by quadrupling tariffs on Chinese electric vehicles and BRICS countries continued to erode the hegemony of the US Dollar.
At the start of May, India and Nigeria, for example, agreed to settle all their trade using their domestic currencies rather than the US Dollar. This follows similar agreements between other nations, especially China, Russia and Iran, designed to circumvent Western sanctions.
USD/MXN recovers on elevated US inflation expectations
The US Dollar gained in most pairs, including versus the Mexican Peso, after data from the Reserve Bank of New York showed a rise in inflation expectations which reinforced the inflationary outlook presented in Friday’s Michigan sentiment survey.
The NY Survey of Consumer Expectations showed consumer inflation expectations for one year ahead increased to 3.3% in April, from 3.0% in March – and the three previous months. It was the highest level since November and stands well above the Federal Reserve’s 2.0% target.
The data further reduces the chance of the Fed moving to cut interest rates in the near future, which is positive for the USD since an expectation of higher interest rates increases foreign capital inflows.
Technical Analysis: USD/MXN pulls back in a downtrend
USD/MXN – the value of one US Dollar in Mexican Pesos – has pulled back after decisively breaking below the bottom of a short-term range last week.
The breakout of the range was a decisive technical development that suggests a protracted move lower. However, after falling to a new low of 16.72 on Friday, USD/MXN reversed and started recovering.
USD/MXN 4-hour Chart
The recovery is not yet strong enough to negate the bearish implications of the breakdown from the range. The short-term trend is still probably bearish, which, given the old adage that the “trend is your friend”, suggests the odds continue favoring more downside.
The pair is still probably likely to resume its downtrend and hit the conservative target for the breakout at 16.54. This is the 0.681 Fibonacci ratio of the height of the range extrapolated lower. Further bearishness after that could reach 16.34, the full height of the range extrapolated lower.
A break below 16.72 would confirm a continuation south.
Given the medium and long-term trends are bearish, the odds further favor more downside for the pair in line with those trends.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.