USD/MXN forecast: Mexican peso is firing on all cylinders
The Mexican peso continued its relentless rally this week as investors cheer the performance of the Mexican economy. The USD/MXN exchange rate dropped to a low of 17.37, the lowest since April 2016. While most emerging market currencies are tumbling, the Mexican currency has jumped by 32% from its lowest level since the pandemic lows.
Mexico economy doing wellCopy link to section
The Mexican economy is doing well, with inflation and the unemployment rate falling. Data published on Thursday showed that the headline consumer inflation in Mexico dropped to -0.22% in May after falling by -0.02% in the previous month. On a year-on-year basis, inflation fell from 6.25% in April to 5.84%, the lowest level since August 2021. Inflation has been falling in each month after peaking at 8.70% in 2022.
The Mexican labor market has held quite well, helped by the rising nearshoring in the country. Nearshoring is a strategy where companies are moving from China to Mexico as tensions with the United States jump. This strategy has then created a huge demand for the Mexican peso since most of these firms are coming with dollars.]
Several well-known companies have announced plans to create a base in Mexico. For example, Tesla is building a giant plant in the country. Other automakers like GM and Ford are also expanding their plants in Mexico.
Therefore, analysts believe that Banxico, the country’s central bank, will have no need to hike interest rates in the coming months. In May, the bank decided to leave interest rates unchanged at 11.25%. The officials maintained that tt will be necessary to maintain interest rates high for a while.
The biggest risk for Mexico is that the American economy is slowing. This is important since Mexico makes most its money from the US.
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USD/MXN technical analysisCopy link to section
The USD to MXN exchange rate has been in a strong bearish trend after peaking at 25.77 in 2020. This year, the pair has dropped below the key support level at 19.42, the lowest level on May 23 last year. It has dropped below all moving averages and the support at 17.42 (July 2017 lows).
The Relative Strength Index (RSI) is approaching the oversold level. Therefore, there is a likelihood that the pair will continue falling for a while as sellers target the key support at 16.00. A move above the resistance point at 18.0 will invalidate the bearish view.