Mexican Peso edges lower on global outlook, Fed caution

The Mexican Peso trades marginally bearish at the start of the new trading week as global growth concerns weigh. A contraction in official Chinese manufacturing data in May combined with a fall in commodity imports due to rising prices are partly to blame. However, the US Federal Reserve’s (Fed) cautious stance at its meeting on Wednesday, with the bank clearly not in a hurry to reduce borrowing costs, further weighed on overall market sentiment. 

This comes after a recovery rally for MXN on Thursday, due to verbal intervention by the President of the Banco de Mexico (Banxico), Victoria Rodriguez Ceja, who said Banxico would step in to prop up the Peso if volatility became too “extreme”.

Political risk also continues to provide a background risk for the Peso. Investors are fretting over the victory of President-elect Claudia Sheinbaum and her left-wing coalition Sigamos Haciendo Historia (SHH) at the June 2 elections. SHH won a supermajority in the Mexican House of Deputies and came two seats away in the Senate. This will give it a mandate to push through radical amendments to the constitution that have set markets on edge. 

Market positioning has added fuel to sell-off following the build-up of an overweight long bet on the Mexican Peso since its long-term uptrend began in 2020. Relatively high interest rates of 11.00%, set by the Banxico to control inflation, have been a major draw for investors seeking returns. This is especially true of carry traders, for example, who borrow in currencies with low interest rates like the Japanese Yen (Apr circa 0.0% -0.1%) and invest in currencies like the Mexican Peso that offer higher returns (Apr circa 11.00%), pocketing the difference.