When we talk about America, most of us think of the United States of America or, in some cases, Canada. However, Mexico is one of the richest countries on the continent and its economy is growing. Trading the Mexican Peso (MXN) against major currencies such as the US Dollar, Euro or British Pound can be an option for traders who want to build a diversified trading portfolio.

However, the reality is that the Mexican peso is not exactly as popular as its more famous counterparts. In this article, we are going to share with you valuable information about the Mexican peso and its correlation with the Mexican economy.

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The Mexican Peso and the Mexican Economy

Mexico has a population of 128,000,000 and the 14th largest GDP in the world in nominal terms. The International Monetary Fund (IMF) raised its GDP growth forecast for 2023 to 2.6%, up 0.8% from the 1.8% growth forecast in April.

This revised outlook reflects the positive economic results recorded by the country in recent months. The economy grew 1.1% in the first quarter of 2023, beating analysts' expectations and building on six consecutive quarters of growth.

According to a report released by the Mexican National Institute of Geography and Statistics (INEGI), annual headline inflation continued to decline in July, reaching 4.79%. This figure is in line with analysts' expectations and marks the sixth consecutive fall in inflation.

The main objective of the Banco de México (the central bank of Mexico) is to preserve the value of the Mexican currency over the long term in order to improve the well-being of Mexicans, while maintaining low and stable inflation. According to its website, the Banco de México was established on September 1, 1925. The Mexican economy has experienced ups and downs in recent decades, with the central bank playing a vital role in reducing inflation. Since 1994, the Banco de México (Banxico) has been autonomous in the design and implementation of its monetary policy.

Performance of the Mexican Peso

After briefly touching a multi-year low of 21.50 in January 2017 against the U.S. dollar, the Mexican peso began a rally and by September 2017 was trading at around 17.60. Over the next two years, the peso stabilized, trading between 18 and 20 pesos to the U.S. dollar.

Source: MetaTrader 5 Admirals, USDMXN, MN Chart – Period: October 1, 2017 to August 17, 2023, accessed August 17, 2023.

Please note: Past performance is not a reliable indicator of future results.

The pandemic that began in 2020 hurt the Mexican currency. The Mexican peso lost value against the US dollar, reaching 25 pesos by the end of March 2020. However, by the end of the year, the peso managed to gain ground, trading at 20 pesos against the US dollar.

Source: MetaTrader 5 Admirals, USDMXN, MN Chart – Period: Period: January 31, 2023 to August 17, 2023, accessed August 17, 2023.

Please note: Past performance is not a reliable indicator of future results.

In 2023, the Mexican peso continued to strengthen against the US dollar, standing at 16.75 on July 1. This is its lowest level in seven and a half years, leading some social media users to refer to the Mexican currency as the “super peso.” According to an ING report, when it comes to currencies in the LATAM region, “the Mexican peso remains one of the best performers of the year in the foreign exchange market and is only surpassed by the Colombian peso (which offers implied returns of 14.4%!). Investors like Mexico's high carry, well-managed economy and exposure to surprisingly strong U.S. growth since the start of the year. Indeed, worker remittances to Mexico reached a record high of $5.7 billion in May.”

What are Analyst Forecasts for the Mexican Peso and the Mexican Economy?

The Bank of Mexico kept its key interest rate at 11.25% on August 10, in line with analyst forecasts, suggesting that the inflation outlook remains “very complex” and hinting that the rate could remain stable for a few more months . The bank's policymakers said in the post-meeting statement that “to achieve an orderly and sustained convergence of headline inflation towards the 3% target, (the board) considers it will be necessary to maintain the policy rate at its current level for an extended period.

ING analysts wrote in a report released July 18 that “the market expects the Mexican central bank to cut rates starting in November. We agree, and we actually see rates falling faster than “There is a lot of built-in confidence that the market is predicting from the appreciation of the peso and the decline in market rates.” They also added that “the Mexican curve (TIIE) incorporates a high degree of confidence in monetary policy, so much so that we are increasingly inclined to anticipate the launch of an easing process in the coming months “. The policy rate of 11.25% is about 6% higher than the federal funds rate, which represents a fairly significant cushion. It has only been wider twice in the past 15 years: during the Fed's emergency cuts during the Great Financial Crisis and at the start of the pandemic. There is no reason why this spread should be larger. In fact, we think it will shrink as the Fed raises rates, while Banxico won't budge.”

Economists at Morgan Stanley suggest that nearshoring could boost the Mexican economy. In their note to investors, published on July 27, they emphasize: “If the American manufacturing industry is to be less dependent on China, we believe the path will pass through Mexico. Nearshoring should be a long and sustained race that could help build new ecosystems in Mexico's existing manufacturing hubs Growth in Mexico's GDP and manufacturing sector is expected to lead to growth in corporate profits, particularly in the financial, industrial and consumer sectors. In fact, during periods of above-average GDP growth, Mexican stocks have tended to outperform in terms of valuation, profitability and operational performance. The trend towards offshoring has already led to a revaluation of Mexican stocks, and “Experts predict further upside for Mexican companies over the next five years as the second wave of offshoring growth gains momentum.”

With Mexican citizens expected to vote in next year's elections, Commerzbank analysts suggest the outcome could be crucial for the Mexican peso and the local economy. “The upcoming elections in July 2024 will be decisive for the Mexican economy and the peso. Investments in infrastructure, security and human capital, as well as business-friendly reforms, are expected to not only increase Mexico's inherent growth potential , but also strengthen the country's attractiveness as an investment destination With appropriate reforms, we believe that Mexico is well positioned to benefit from an increase in offshoring and “friendshoring” activities by global companies, which would have a positive long-term impact on MXN,” they write in their report.

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Risk Management and Trading of the Mexican Peso

If you have decided to include the Mexican Peso in your trading portfolio, you must first assess the risks. Novice traders sometimes tend to overestimate their abilities, making mistakes due to inexperience and the urgency to start trading. However, mistakes made in this area can have negative consequences, such as loss of funds.

Trading the Mexican Peso, like any currency pair, requires practice and the implementation of a strategy that includes the use of risk management tools. Novice traders therefore need to carefully analyze the market and develop a strategy that fits their financial goals.

Learning how to use these risk management tools is therefore essential, especially when starting out in the world of trading. There are many sources of educational content: webinars, detailed articles on how to use these tools. These can optimize your trading experience by reducing your stress so you can focus on developing the best possible strategy.

Are you interested in news trading? Learn how this approach works with our free webinars. Interact with professional traders. Attend live trading sessions and learn more.

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This content does not contain and should in no way be construed as containing investment advice or recommendations, an offer or solicitation to trade in any financial instruments. Please note that this marketing communication is not a reliable indicator of any current or future performance, as circumstances may change over time. Before making any investment decision, you should seek the advice of independent financial advisers to ensure that you understand the risks involved.

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