- The Mexican Peso slips as markets adopt a risk-off sentiment following a lackluster stimulus announcement from China.
- However, potential losses for the Peso may be mitigated by growing investor confidence in the new Sheinbaum administration.
- The USD/MXN pair has fallen below the critical 50-day SMA and is testing the bottom of a significant rising channel.
The Mexican Peso (MXN) has retreated against its key pairs on Tuesday, ending an over-week-long uptrend as an overall risk-off mood influences the markets, particularly impacting the risk-sensitive Peso.
In the Asian session, after a strong start, Chinese stocks reversed course following a highly anticipated briefing by the Chinese state planner, which failed to deliver the expected levels of investment.
Mexican Peso Weakens on Risk-Off Tone
The Mexican Peso is facing downward pressure on Tuesday amid negative market sentiment triggered by disappointing news from Beijing. Like other emerging-market currencies, the Peso typically weakens when global economic prospects diminish.
An initial rally in China’s benchmark CSI 300 equity index was abruptly halted after the Chairman of the China National Development and Reform Commission (NDRC), Zheng Shanjie, announced only $28 billion in additional funds for local governments.
This comes on the heels of a substantial liquidity injection announced by the People’s Bank of China (PBoC) last week, which was the largest since the Covid pandemic. However, investors deemed the additional fiscal measures inadequate for China to achieve its growth targets for the year.
As a result, Asian stocks pulled back on the news, commodities weakened significantly due to a dimmed global growth outlook, and European stocks opened lower.
Market Optimism for Sheinbaum Administration
Despite the Peso’s decline, potential losses may be limited by easing political risks as President Claudia Sheinbaum’s administration takes over from her predecessor, Andres Manuel Lopez Obrador (AMLO). Early indications suggest that markets view Sheinbaum as more investment-friendly than AMLO.
On Monday, Altagracia Gómez, the newly appointed coordinator of the government’s Business Advisory Council, announced her collaboration with 13 automotive companies operating in Mexico to develop a ten-point action plan aimed at strengthening the country’s key car-manufacturing industry. This plan includes enhancing local suppliers, focusing on micro, small, and medium-sized enterprises (MSMEs), increasing financing provisions for companies, and improving skills training for the industry, particularly for integrating young people into the workforce, as reported by El Financiero.
Following Sheinbaum’s election in June, the Peso weakened by 10% amid concerns that she would continue AMLO’s radical reform agenda, which many viewed as anti-market and undemocratic. AMLO’s last major act before handing over power to Sheinbaum was passing a controversial judicial reform bill that allows for the election of judges rather than their appointment. However, the new law is facing delays due to a Supreme Court decision to re-evaluate its implications for judicial independence.
Technical Analysis: USD/MXN Breaks Below 50-Day Moving Average
The USD/MXN pair has broken below the 50-day Simple Moving Average (SMA) and is testing the bottom of a medium-term rising channel.
USD/MXN Daily Chart
USD/MXN could find strong support at the channel’s base, potentially allowing for a recovery. The medium and long-term trends remain bullish, and the technical principle that “the trend is your friend” supports a continuation of the upward trajectory.
On Friday, the pair formed a bullish Japanese Hammer candlestick pattern at the channel’s base, followed by a slightly bullish green Japanese Doji candlestick the next day. This configuration may indicate a turning point for the short-term trend and the beginning of a recovery. However, since then, prices have not shown signs of upward movement.
In fact, the short-term trend remains bearish, and the pair has now broken below the 50-day SMA, a key support level. A decisive breakout below the channel could jeopardize the medium-term uptrend in USD/MXN.
A significant break would be characterized by a longer-than-average bearish candlestick that cleanly pierces below the channel line and closes near its low. Such a breakout would likely lead to an initial downside target of 19.00 (the August 23 low and a round number), followed by 18.65, which corresponds to the level of the 100-day SMA.
