On Thursday, the Mexican Peso made a notable recovery against the US Dollar, following a turbulent day that initially saw it drop to a one-month low. In a surprising turn, technical buying sparked a bounce back, resulting in an average gain of approximately half a percent among the Peso’s primary trading pairs, including USD/MXN, EUR/MXN, and GBP/MXN. This resurgence may be linked to a revival in carry trade activities, particularly influenced by the recent decline of the Japanese Yen.
The recent strength of the Mexican Peso appears to be surprising, especially considering the prevailing negative economic indicators. The Yen’s depreciation is thought to rekindle interest among investors in the carry trade, where funds are borrowed in low-interest currencies and invested in currencies offering higher returns, such as the Peso. This dynamic is particularly attractive given Mexico’s interest rates, currently set at 10.50% by the Bank of Mexico, in stark contrast to Japan’s mere 0.25%.
In a typical carry trade scenario, investors would borrow in the Japanese Yen to invest in the Mexican Peso. The profit arises from the difference in interest rates, which stands at 10.25% when considering the current yields. Should the Yen continue to weaken or the Peso strengthen, the returns from such trades would continue to increase.
However, the outlook for the Peso is not without its challenges. Economic figures released this week revealed significant declines in both Economic Activity and Retail Sales in August, suggesting a deteriorating economic landscape. This trend corroborates the International Monetary Fund’s predictions for sluggish growth in Mexico throughout 2024 and 2025. Such economic headwinds could compel the Bank of Mexico to contemplate lowering interest rates, potentially deterring foreign investment.
Additionally, uncertainties surrounding the upcoming US elections, especially with former President Donald Trump regaining traction, pose extra risks for the Peso. Trump’s stance on using tariffs to restrict imports, particularly on Mexican products, could further pressure the currency.
As the USD/MXN pair retraces after nearing the 20.00 level, it remains within an upward trend channel. The Relative Strength Index indicates maintained bullish momentum, suggesting that any current pullback may only be a brief interruption before the trend resumes and possibly reaches new highs. Following a recent breakout above the October 1 high of 19.83, targets are set towards the September 10 peak of 20.13.
