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© Reuters. MXN/USD Price Forecast as Fed Approaches Terminal Rate
Invezz.com – The (MXN) is one of the most traded currencies in the Western Hemisphere, after the US and Canadian dollars. In addition, it has a close correlation with the energy markets, since Mexico is one of the largest oil producers in the world.
As a curious fact, the Mexican peso was the first currency in the world to use the already famous dollar sign $.
Although it is not traded as much as other currency pairs, the pair is quite liquid and offers access to growth opportunities in Latin America.
Mexico has historically had higher interest rates than the United States
An interesting fact that makes the Mexican peso attractive is that historically interest rates have been higher than in the United States. This is important because the two countries share a common border, which means that there is a lot of trade interaction between the two countries.
The graph below shows that even during the COVID-19 pandemic, interest rates in Mexico did not fall below 4%. By comparison, the federal funds rate was cut to the lower limit of 0.25%.
By keeping interest rates higher than the US, Banco de México hopes the peso will be more attractive than its US counterpart. This strategy is common among emerging economies and is especially interesting because the peso is correlated with energy markets. More precisely, with the price of oil.
But now that the Fed is approaching the terminal rate, what will happen to the MXN/USD exchange rate?
The policy rate ceiling in the US is close
The Federal Reserve is close to the maximum policy rate as inflation shows signs of cooling. This is the second most aggressive rate hike cycle on record, putting pressure on emerging markets as they have to service their debt in the global reserve currency.
As such, Banco de México was forced to raise rates further to maintain the attractiveness of the peso.
MXN/USD remains bullish while above the pivotal area
The Mexican peso has outperformed the dollar since the COVID-19 pandemic. It formed an ascending triangle that took two years until the price finally broke higher in early 2023.
MXN/USD Chart by TradingView
One level, in particular, looks important: the $0.05 level. It is fundamental, and it is the level that offered the most resistance during the consolidation of the 2-year ascending triangle.
Therefore, only a fall below the pivotal level would change the bias of the MXN/USD exchange rate from bullish to bearish. Unless that happens, the bulls are likely to step in on every pullback.
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