Fundamental Analysis: Peso Declines despite Better Data

Fundamental Analysis: Peso Declines despite Better Data

The Mexican peso has made significant losses against most major currencies today as ‘risk-off’ sentiment appears to be returning. Despite significantly stronger data from Mexico so far this week and oil holding, MXN weakened sharply this afternoon.

Dollar-peso is currently trading around fortnight highs at Mex$19.32, similar to EURMXN around Mex$21.74. The peso also declined significantly against the yen today to lows of ¥5.70.

Sentiment and growth driving EM losses

Over the past few days, emerging markets in general have faced difficulties due to sustained concern about growth prospects. Data from the eurozone and China have hit sentiment on currencies like the peso and rand.

Leaving aside USDMXN temporarily, the peso typically tends to do better in most of its pairs as the American economy shows more signs of vitality. The general picture emerging of less impressive growth in the USA this year is another negative factor for the peso.

So much for the negatives, but peso bulls have an unusual amount of positives to study recently. Today’s data from Mexico were some of the most important of these. Unemployment for February decreased about 0.3% to 3.3%, beating the forecast. Mexico’s trade balance was also positive $1.22 billion in February. Retail sales and overall economic activity improved in January.

Rates continue to drive demand for the peso as well. The current benchmark rate of 8.25% is one of the highest among OECD/G20 countries, so even against the dollar differentials are 5.75-6.00%.

Banxico unlikely to surprise tomorrow

Speaking of rates, the Bank of Mexico’s going to decide tomorrow night at 19.00 GMT. No change is expected, but traders would be likely to study some of the comments from the bank in its statement, especially those on inflation and growth.

The summary from the bank is likely to be fairly similar to last month’s, although one would expect some stress on growth risks. In general, Banxico is unlikely to surprise majorly tomorrow.

Bounce likely for MXN, but watch sentiment

Overall, current fundamentals support the peso in most of its pairs, so some gains from current levels are expected into the end of the week. However, traders must not ignore the possibility although remote of a shock at Banxico’s announcement tomorrow. Sudden changes in sentiment across emerging markets also have the potential to drive volatility.

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