The Mexican peso gained ground against the greenback after the report of a slight decline in the unemployment rate in July. The strengthening of the peso was also aided by the widening of the trade surplus in August. However, the gains recorded by the peso were limited as the Mexican central bank had slashed the benchmark interest rate for the 11th time in a row on September 26th. In general, a currency becomes unattractive when interest rates are lowered and vice-versa.
The jobless rate in Mexico inched downwards to 5.2% in August, from 5.4% in July, but stood at levels not witnessed since 2014, mainly due to the COVID-19 crisis. The reported figures indicate that the labor market is rebounding, albeit at a slower pace than earlier months, against the backdrop of the systematic reopening of firms that are involved in non-essential economic activities.
Between July and August, employed people increased to 50.40 million, compared with 49.70. The number of jobless people, however, was almost unchanged at 2.80 million. In a similar period last year, the jobless rate was 3.7%.
The country’s trade surplus increased to $6.12 billion in August 2020, from a mere $0.40 billion in August 2019. The reported figure was the largest surplus ever recorded as imports plunged 22.2% on a y-o-y basis to $30.86 billion.
The decline in imports was led by a 20.4% drop in intermediate goods and a 34.5% decline in consumption. Furthermore, capital imports slumped 19.8%. Exports growth slowed to 7.7% to $36.98 billion as sales decreased by 11.4% in oil products. Non-oil products posted a 7.4% drop in growth.
Mexico, being a major oil exporter, shipped 1.190 million barrels of crude per day, up from 1.081 million barrels last year. Correspondingly, crude was exported at $39.52 per barrel, $9.99 below the price at which crude was shipped in August 2019. Non-oil exports to the US dropped 7.7%. This includes a 12.9% decrease in automobiles and a 4.7% drop in other goods. In the first eight months of the year, Mexico posted a record surplus of $14.57 billion.
As mentioned above, Banco de México (central bank of Mexico) had slashed its key interest rate by 25 basis points to 4.25%, reflecting the 11th successive rate cut in a row. The current interest rate is the lowest since August 2016.
Economic activity in Mexico started recovering in June and July, even though an environment of uncertainty and a downward risk exists. Annual inflation increased to 4.05% in August from 3.62% in July, driven by an increase in high energy costs. Nevertheless, the inflation rate remains above the target level of 3%.
The slight decline in the unemployment rate and increase in the trade surplus is expected to keep the USD/MXN pair range-bound with a slight bearish bias.
The historical price chart indicates that the USD/MXN pair is declining after facing resistance at 22.49. The next support is anticipated only near 21.72. The stochastic indicator is declining from the overbought region. Therefore, we are anticipating the currency pair to remain in a downtrend in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
