Can the Best-in-Class Mexican Peso (MXN) Survive a US Recession?

Child celebrating independence day, 15 september 2022
Child Wearing A Traditional Mexican Hat; is the rise of the Mexican peso due to a fall? – Photo: Getty

The Mexican peso (MXN) has been a standout performer in 2022, up 3% against the US dollar, as Banxico, Mexico’s central bank, has continuously raised interest rates – 9.25% currently after a recent rise of 75 points – closely following the Fed’s Trajectory.

MXN’s fortunes are tied to the health and resilience of the US economy and if it falters, MXN’s performance could flatten or fade – perhaps quickly and with little warning.

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End of the party?

Victoria Rodríguez Ceja, the first woman to head Mexico’s central bank, was an unknown when she was appointed in late November 2021, just as global inflation was building quietly but forcefully through supply chains almost everywhere.

Rodríguez Ceja’s view on inflation was not widely known to markets at the time – the peso slid to its lowest level since March 2021 when his appointment was announced – but Banxico had already cast a part of the land, raising inflation four times in a row until that. time.

Given the inflationary pressures that were setting in, this was a useful ballast. Fast forward to now: Mexico’s annual inflation rate hit 8.70% in August 2022, down from 8.15% in July, the highest rate since December 2000.

baked heart

The most significant reading – and biggest currency concern – is Mexico’s core inflation which jumped to 8.05% in August, the highest since 2000 from 7.65% a month earlier.

Capital fx analyst Piero Cingari thinks MXN looks increasingly vulnerable. “The Mexican peso has been perfectly protected by the carry trade, with the Banxico-Fed key rate differential hovering between 5.5 and 6% since March 2022.

“However, the strengthening of MXN could be nearing its peak. Given Mexico’s heavy economic dependence on the United States, a downturn in the latter would seriously hurt the former.

Fabrication of fractures

US numbers contain clear cracks. On Monday, jobs data from the Institute for Supply Management (ISM) confirmed a contraction for the fourth time, with PMI data for manufacturing activity cooling to 50.9 from 52.8 in August.

A big noise lower given that analyst estimates had predicted 52.2. Manufacturing accounts for nearly 12% of the US economy; any reading below 50 indicates a contraction.

Then there is the broader job market. The US Bureau of Labor Statistics (LBS) reported 315,000 more jobs added in August, but July’s number was well over half a million at 526,000.

Employment in the United States more fragile

What we understand less about the American economy is the tension between the fall in full-time work and the – strong – rise in part-time work. In August, the number of full-time jobs actually fell by 242,000, the third consecutive month, totaling 465,000 fewer jobs overall, the FT recently reported.

Many of these jobs will be in the service sector and will likely be low paying. The United States also has a very difficult immigration system, which sometimes makes it difficult to attract talent.

Yesterday’s job vacancies and labor turnover (shocks) survey was also weak, although official US nonfarm payrolls numbers won’t arrive until Friday. .

Yet underlying inflation in the United States – 6.3% in August, the highest since March – continues to rise, warns David Morrison of Trade Nation. “Core shows he hasn’t maxed out. Once inflation on the services side is on the way, there is not much to do. The service side of the economy has to react to higher prices, pay higher wages, pay higher input costs, whatever they are.

The AMLO feuds

At the moment, Banxico appears to be leaning toward contraction risk. “An environment of uncertainty prevails, while the balance of risks to economic activity remains tilted to the downside,” it said in its September 29 statement.

Currently, the market expects the tightening to continue with key rates reaching 10.4% by the end of the year. In the background, Biden administration feuds linger between the two close neighbors.

Populist Mexican President Andrés Manuel López Obrador (AMLO) has made foreign investors wary by limiting investments in wind and solar energy and there are fears that Mexico could violate the United States-Mexico-Canada agreement, undermining investment international markets in clean energy.

By midday, DXY was up 0.67% at 110.71 while GBP/USD was down almost 1% at 1.1367; EUR/USD fell 0.68% to 0.9916. A strong jobs report on Friday could push DXY higher.

Final service and composite readings from Japan and Australia were revised slightly higher “while the final Eurozone PMI disappointed,” added Marc Chandler of Bannockburn Global Forex. “The UK PMI has been revised slightly higher.”

Further reading

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