USD/MXN: How Low Can You Go?
USD/MXN is on course to finish lower on every day this week as the Mexican peso pushes back against the might of the US dollar.
The unstoppable Mexican peso has carved out gains against the dollar in 6 out of the last 7 trading sessions. Not only has the peso gained 4.4 against the greenback since August 3, but it’s one of the few currencies that is up versus the dollar this year. At the time of writing, the Mexican peso has strengthened by more than 2 percent against the buck in 2022.
The breakdown of US/China relations has been a boost for Mexico, which continues to attract investment from US manufacturing companies. American companies, once reliant on China to fulfil their manufacturing needs have been on-shoring production closer to home. As a result, Mexico’s cheap labor is helping business flow west.
CPI Drops, Peso Pops
The peso’s latest gains are due to the softer-than-expected US inflation figures reported earlier this week.
On Wednesday, the Bureau of Labor Statistics released consumer inflation numbers for July. Over the preceding year, the headline Consumer Price Index (CPI) climbed by 8.5 percent. This was much lower than the 9.1 percent rate in June and less than the 8.7 percent rate predicted.
Following the CPI release, a risk-on environment pushed US indexes higher and the greenback lower. Because of the lower inflation rate, the likelihood of a 75bp interest rate increase at the next FOMC meeting has fallen, contributing to the dollar’s negative mood.
Another reason the peso is holding up is the increasing quantity of cash flowing south from immigrant workers who send money to Mexico from the United States. Despite the faltering US economy, remittances to Mexico climbed by 16% in the first half of 2022. Overall, remittances from overseas hit a record high of $5.5 billion in the year to June, accounting for 4.2% of Mexico’s GDP.
The daily chart shows USD/MXN has broken down from its medium-term uptrend. As a result, the rate is also below the major moving averages, indicating more weakness lies ahead.
Above the market, the 100-Day Moving Average (DMA) at 20.14 (blue line) is the first significant resistance level. And above that, the rising trend line at 20.20 offers an additional obstacle.
As long as the price remains below the 100-DMA and the rising trend, USD/MXN should continue to trade with a bearish bias. For that reason, a return to the May lows around 19.40 could be on the cards in the coming weeks.