- USD/MXN appreciates as the Mexican Peso loses ground due to risk aversion amid rising Middle East tensions.
- US officials have been told that Israel is fully prepared to launch an operation into Iran.
- The Banxico may keep its interest rates higher due to a rise in domestic inflation.
USD/MXN edges higher after hitting a 10-month low at 18.82, which was recorded on Wednesday, currently trading around 18.90 during the European hours on Thursday. The pair gains ground as the US Dollar (USD) attracts buyers against the Mexican Peso (MXN) due to increased safe-haven demand amid escalating geopolitical tensions between Israel and Iran.
Reuters reported that the United States (US) decided to reduce its personnel from the Middle East. US officials have been told that Israel is fully ready to launch an operation into Iran, reported by CBS News senior White House correspondent Jennifer Jacobs.
On Wednesday, Trump said that the US would not allow Iran to own a nuclear weapon. However, traders await the meeting between the US and Iran scheduled on Sunday for nuclear talks. Axios reporter Barak Ravid reported that White House envoy Steve Witkoff is going to meet Iranian Foreign Minister Abbas Araghchi in Muscat on Sunday and discuss the Iranian response to the recent US proposal.
However, the USD/MXN pair faced challenges as the US Dollar (USD) struggled amid increasing odds of the Fed rate cut in September, boosted by cooler-than-expected US inflation in May. The US Consumer Price Index (CPI) rose 2.4% year-over-year in May, slightly above 2.3% prior but below the market expectations of a 2.5% increase. The core CPI, which excludes volatile food and energy prices, climbed 2.8% YoY in May, compared to the consensus of 2.9%.
The Bank of Mexico (Banxico) is expected to maintain its restrictive policy stance, reinforced by a rise in headline inflation to 4.42% and core inflation to 4.06%, its highest in eleven years. The higher policy rate has preserved an appealing real interest rate, attracting capital inflows and supporting the Mexican Peso.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.