What is USD/MXN?
The USD/MXN currency pair represents the exchange rate between the US dollar and the Mexican peso, or the number of Mexican pesos (the quote currency) necessary to purchase one US dollar (the base currency).
The United States dollar is the most widely transacted currency in the world and is held by the majority of central banks and financial institutions. It is the official currency of a number of nations, including El Salvador and Zimbabwe. As a result of its stability and dependability, the dollar is the preferred currency for international transactions and reserves. In addition, the dollar's predominance in international trade has significant implications for global exchange rates and economic policy, and it may serve as a benchmark for nations that wish to set or peg their currencies to the dollar's value.
The Mexican peso is one of the oldest currencies in North America, having been issued at par with the US dollar until 1857 when it ceased to be legal tender. In 1993, the Bank of Mexico changed its monetary policies and introduced the current version of the currency, by redenominating 1,000 old pesos into one ‘Nouevo’ peso. This followed several years of inflation and devaluation caused by the oil crisis of the late 1970s and Mexico's default on its external debt in 1982, which resulted in a severe case of capital flight.
The strong relationship between the United States and Mexico, which share a 2,000-mile border and have extensive cultural and economic ties, as well as its high liquidity and volatility, attract traders to this pair, which is considered "exotic" because the Mexican peso comes from an emerging market.
What affects the price of the USD/MXN pair?
The trade relationship between the United States and Mexico can influence the USD/MXN exchange rate. Mexico is the United States' largest goods trading partner and second-largest export market, and companies based in the United States account for more than half of Mexico's foreign investment. The US-Mexico-Canada Agreement (USMCA) supplanted the North American Free Trade Agreement (NAFTA) on July 1, 2020, to modernise and strengthen trade relations between the three countries.
Due to the close economic and political ties between the United States and Mexico, the USD/MXN exchange rate is affected by government decisions regarding immigration, border control, and taxation, all of which can affect the trade balance between the two countries. Stricter immigration policies or increased border controls have the potential to disrupt cross-border trade, travel, and investment, thereby influencing the demand for each nation's currency. A deterioration in US-Mexico trade relations could reduce demand for Mexican pesos, causing their value to decline relative to the US dollar and leading to an increase in the USDMXN exchange rate.
Changes in the monetary policies of the two countries' central banks can also impact the demand for their currencies on the foreign exchange market. When a central bank raises interest rates, such as Mexico's benchmark policy rate, which reached an all-time high of 11.25 percent in 2023, it can make assets denominated in its currency more alluring to investors, thereby increasing the currency's demand. As the Mexican central bank raises interest rates, it can make Mexican peso-denominated assets more attractive to investors, thereby increasing demand for the Mexican peso and causing its value to increase relative to other currencies, such as the US dollar. This causes a decrease in the USDMXN exchange rate.
The USD/MXN exchange rate can also be affected by global energy prices, as both countries are significant crude oil producers. When oil prices rise, the US dollar tends to depreciate against the Mexican peso and other oil-exporting nations' currencies. Oil price fluctuations also have an impact on the level and volatility of the pair’s exchange rate.
What to watch out for when trading USD/MXN?
Economic data releases such as GDP growth, employment statistics, inflation, and the US and Mexico's trade balances should be monitored by USD/MXN traders. Observe announcements from influential organisations in both nations. These consist of:
- U.S. Federal Reserve and Bank of Mexico (BdeM) announcements for Interest Rates and shifts in monetary policy
- US economic data (GDP, CPI inflation, Employment Change, manufacturing/services PMI, consumer sentiment)
- National Institute of Statistics and Geography (INEGI) for data on Trade Balance, unemployment rate, Consumer Price Index (CPI), and Gross Domestic Product (GDP)
- Oil-related market events (OPEC meetings, oil inventory data)