Mexican Peso strengthens as market sentiment improves

• The Mexican Peso is rising in line with upbeat sentiment on Thursday. 
• The move comes after the Peso made gains on Wednesday despite the passing of controversial judiciary reforms in Mexico.
• USD/MXN breaks down from its rising bullish channel, indicating potentially more weakness on the horizon. 

The Mexican Peso (MXN) continues rising in its most heavily traded pairs on Thursday, building on the 1.4% to 1.7% gains of the previous day. 

Market sentiment is strong, with Asian equities making gains overnight, the Old Continent's stock indexes rising at the start of the European session, and commodities recovering across the board. Overall, the positive market mood supports the risk-sensitive Peso. 

Mexican Peso shrugs off Senate vote

The Mexican Peso rose on Wednesday despite passing a controversial judicial reform bill through the Senate. Several large-name investors, including Morgan Stanley, Julius Bear, and rating agency Moody's, have warned the reforms could undermine the independence of the judiciary, harming both foreign direct investment and the country's economic prospects. 

In June, the Peso depreciated by over 10%, and Mexican bourses saw similar losses following the news that the ruling Morena-led coalition won a super-majority in Mexico's general election. The victory enabled them to pass a set of controversial reforms, including the judicial reforms passed in the Senate on Wednesday, which require amendments to the country's constitution. However, the eventual voting through of the bill did not cause any additional weakness to the Peso on the day. 

MXN actually bucked the FX-market trend on Wednesday by gaining over 1.4% against the US Dollar (USD). This contrasted with most other currencies, which weakened against the Greenback following the release of higher-than-expected core US inflation data. USD rose because the data lessened the chances of the Federal Reserve (Fed) making a larger-than-standard 50 basis points (bps) cut to interest rates at its September meeting. 

Strong automobile sales data showing record car sales in Mexico could have been one factor in the Peso's strength. Commercial car sales in the country are expected to hit a record 56,592 in 2024, according to a report from the Mexican Automotive Distributors Association (AMDA) on Wednesday. This is above the previous record of 53,300 sales set in 2007.

The data follows the announcement in August that Volvo is planning to build a $700 million heavy-duty truck manufacturing plant in the northern Mexican city of Monterrey. The company cited logistic efficiencies and the benefit of being able to sell vehicles across the region, including the US, as reasons for the move, according to Reuters. 

The trend continues the nearshoring boom Mexico has enjoyed in recent years. "Mexico exported $593 billion worth of goods in 2023, with much of it transported over land using trucks or tractor-trailers. Cargo flows over the U.S.-Mexico border also made the countries each other's largest trading partners last year," said the Reuters report. 

At the time of writing, one US Dollar (USD) buys 19.75 Mexican Pesos, EUR/MXN trades at 21.75, and GBP/MXN at 25.76.

Technical Analysis: USD/MXN breaks out of rising channel 

USD/MXN has broken out of an ascending mini-channel. The breakdown indicates more weakness probably on the horizon for the pair.  

USD/MXN 4-hour Chart 

According to technical analysis, the breakout from the channel activates a downside target at 19.62, the 0.618 Fibonacci (Fib) extension of the height of the channel extrapolated to the downside.  More bearishness could even see prices fall to around the 19.50 mark, the 1.000 ratio Fib extension and the key support level from the August 22 swing high.

However, the overall trend on the medium and long-term is bullish, and since, according to technical analysis theory, "the trend is your friend," this favors more upside emerging eventually. As such, any weakness may be temporary before the pair rallies again.

A break above the top of the mini-channel and year-to-date high at 20.15 would provide confirmation of a continuation of the bull trend, with the next target at the upper channel line in the 20.60s.