Fundamental Analysis: Slight Data-Driven Gain for the Peso

Fundamental Analysis: Slight Data-Driven Gain for the Peso

The Mexican peso has made limited gains so far today after a number of fairly strong economic figures this week. A degree of optimism on trade has also given some support to emerging currencies like MXN. The dollar though has received some support from the latest talk of limited rate cuts next month.

USDMXN has now erased almost all of this week’s gains. This symbol moved down to about 19.09 in the late morning GMT. EURMXN was similar at around 21.70. Volatility has been a bit higher against the yen, though, with a peso now worth around ¥5.63, a small gain from the open in Tokyo.

Decent data and some positivity on trade

There’s been quite a number of significant economic releases from Mexico this week, and most of them have been positive. The only real disappointment was annual economic activity for April, which missed the consensus by over 2% at negative 1.4%. Apart from this, retail sales on Tuesday was a positive release, with 1.6% annual growth in line with the previous number higher than the consensus.

Yesterday’s unemployment rate from Mexico printed 3.5% as expected. Today’s trade balance for May was probably the best result of the week for the peso. Slightly over a billion in positive territory is much better than the predictions, which signalled a deficit of slightly less than a billion.

These figures have general given support to the peso as Banxico’s rate decision tonight approaches. Positivity in emerging markets generally has also come from rumors that the Sino-American trade war could be resolved soon. The USA’s Treasury Secretary Steven Mnuchin asserted in an interview with CNBC last night EST that a deal was about 90% complete. It seems to be possible that a deal could result from this weekend’s meetings between Donald Trump and Xi Jinping.

Strong support for MXN from oil

Mexico is one of the world’s largest producers of oil with around 25 million barrels being extracted every day. This means that the latest ongoing upward movement by crude has given strong support to the peso. American light oil has moved back above the important psychological area of $59 for a barrel in today’s trading. $60 seems to be a bigger challenge, but if oil does make more gains one would expect the peso to reflect these to some degree.

Banxico decides on rates tonight

Without doubt the most important news for the peso in the rest of the week is the Bank of Mexico’s decision on rates at 19.00 tonight. No change is likely to the current 8.25% benchmark rate. However, traders will be studying comments from senior members of Banxico, particularly on the following topics of concern raised at earlier meetings in 2019:

  • Trade disputes
  • Financial conditions (both tightening and loosening)
  • Local political and wider geopolitical risks

Banxico’s attitude towards these risks could be a crucial driver of the peso over the next few days. Also key are any comments on annual inflation, which has been mostly stable around 4.4% for the past year.

Beyond the central bank, Monday features a couple of important releases: business confidence and manufacturing PMI for June. Neither of these is likely to surprise markets much, but a drop in PMI below 50 per the consensus could be a negative for MXN.

The G20 meeting and Donald Trump’s meeting with his Chinese counterpart are more likely to be volatility factors. While an extreme result on trade in either direction is possible, it seems more probable that limited progress without a final deal could result.

Peso’s fundamentals look fairly positive

Overall, the fundamental picture for the peso looks reasonably strong. This might mean that MXN could move up against many currencies into the end of the week. On the other hand, the peso’s notorious volatility and of course the technical picture could alter this outlook completely: at no time is any trader advised to act purely on fundamentals.

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