USD/MXN: Peso is doing something it hasn’t done in decades

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Written on Jul 14, 2023

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The Mexican peso has continued shining this year as its great comeback continues. The USD/MXN price plunged to the lowest level since 2015, meaning it has plunged by over 30% from its highest level in 2020. Most importantly, the peso has risen in the past seven straight months for the first time in decades.

Mexican peso rally continues

The Mexican peso has been one of the best-performing currencies this year. This strength continued this month after the US published weak jobs and inflation. On Friday, data showed that the US economy added over 209k jobs in June, lower than the median estimate of 230k.

The jobs report showed that the labor market, while strong, has started to soften in the past few months. Another report revealed that US consumer price index (CPI) continued falling last month.

The headline CPI dropped to 3.0% while the core CPI that excludes the volatile food and energy products fell to 4.8%. Therefore, my modeling shows that the main inflation will move to the Fed’s target of 2.0% by December. All these numbers have helped to push the US dollar index (DXY) below $100.

The USD/MXN pair has also crashed because of the actions of Mexico’s central bank. Banxico has been highly hawkish in the past few months. It started hiking interest rates in June 2021 when it boosted rates by 0.25%.

Since then, the bank has hiked rates from 4.25% to the current 11.25%. It has left interest rates unchanged at this level in the past three straight months and analysts believe that the bank will start cutting them later this year.

The strong Mexican peso has helped to moderate the country’s inflation. Data published last week showed that the headline inflation dropped to 5% in June.

USD/MXN forecast

USD/MXN chart by TradingView

The monthly chart shows that the USD to MXN exchange rate has been in a strong freefall since 2020. It has now dropped in all of the past seven months. In June, the pair moved below the important support level at 17.44, the lowest level on July 3rd.

The USD.MXN price has moved below the 50-day and 100-day moving averages while the Relative Strength Index (RSI) has drifted downwards. Therefore, the path of the least resistance for the pair is lower, with the next level to watch being at 16.