On Monday morning, the Mexican Peso (MXN) experienced declines across its major trading pairs as traders resumed activity after the weekend. The Peso’s weakness is attributed to the Japanese Yen’s (JPY) ongoing appreciation, which signals capital outflows from the Peso as the carry trade unwinds. Additionally, escalating tensions in the Middle East following violent clashes between Israel and Hezbollah are contributing to the downward pressure on riskier assets, including the MXN.
In the U.S., Durable Goods orders for July surged by 9.9%, marking a significant rebound from the previous month’s 6.9% decline and exceeding the anticipated 4.0% increase. This marks the largest gain since May 2020 and highlights the resilience of the U.S. economy, which contrasts with prevailing pessimistic sentiments.
Despite this positive economic data, the USD/MXN exchange rate remained relatively stable, trading at 19.21, only slightly higher following the report.
The Peso saw a brief recovery on Friday, driven by Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole symposium. Powell indicated that the Fed is considering interest rate cuts due to a slowdown in the U.S. labor market. He noted, “The timing and pace of rate cuts will depend on incoming data,” while also acknowledging reduced inflation risks and increased downside risks to employment.
Powell’s remarks led to a drop in the U.S. Dollar (USD) as expectations of lower interest rates typically result in reduced foreign capital inflows. The USD/MXN fell over 2% by the end of the day, with EUR/MXN and GBP/MXN also declining, though to a lesser extent.
Following Powell’s speech, other Federal Reserve officials echoed similar sentiments. Chicago Fed President Austan Goolsbee emphasized the importance of monitoring the cooling job market, given that inflation is trending lower. Philadelphia Fed’s Patrick Harker advised a cautious approach to rate cuts, warning against significant reductions.
Despite Friday’s rebound, the Peso ended the week considerably weaker against its key pairs. Factors contributing to this decline include weaker-than-expected Mexican inflation data for August, reduced retail sales in July, and emerging concerns about potential constitutional changes proposed by the new Mexican government.
The unwinding of the carry trade, which had previously supported the Peso through high foreign capital inflows, now poses an additional challenge. This strategy involves borrowing in a currency with low interest rates, such as the JPY, to invest in a currency with higher rates, like the MXN. However, with the JPY appreciating and the MXN depreciating, the profitability of this trade is diminishing, leading to capital outflows from the Peso.
The Mexican Peso’s appeal in the carry trade was bolstered by relatively high interest rates in Mexico, which peaked at 11.25% in 2023 before being reduced to 10.75% in two incremental cuts. August’s rate cut by Banxico surprised markets, but the minutes from the meeting revealed that the decision was closely contested, with two board members voting against it. This suggests that further rate cuts may be slow or deferred, providing only modest support to the MXN.
As of the latest data, the exchange rates are as follows: 1 USD equals 19.21 MXN, EUR/MXN is 21.45, and GBP/MXN is 25.37.
