The U.S. dollar(USD) has remained a super currency in the global financial market, preferred by many top traders as a safe currency to transact with. In 2022, for instance, the USD registered lots of strength in the money market, which was bad and good news to investors as it comes with both risk and opportunities.
The reason for mixed feelings on the dollar's stability is that changes in its value can tremendously impact internal sales as it erodes the value of currencies weaker than the USD.
One of the currencies that has been on an upward trend compared to the USD is the Mexican Peso(MXN). Many economic indicators have contributed to this, making USD and MXN a hot combination in the foreign exchange market.
Here are the top five economic indicators driving USD/MXN trends:
1. Disparity in Interest Rate
Interest rates are one of the major economic indicators driving the USD MXN trends in the financial market.
Every country has its central bank as its economic monitor, which plays a vital role in determining the prevailing interest rates within the economy. The level of interest set by the respective central banks of every country is known as the base interest rate and is used as a tool to monitor the economy.
For instance, there are terms when the central bank policymakers deliberately raise the interest rate to mitigate problems like inflation or lower it to pump life and increase economic growth. The bottom line is that fluctuations in the base interest rate borrowers bring with them lots of impacts on the economy at large.
Furthermore, changes in interest rates affect currencies. The big question is, how? High-interest rates indicate a growing economy, and such economies attract investors. In the case of foreign investors, there follows an increased demand for the local currency, effectively increasing its value.
The base interest rates between the U.S. and Mexico will always affect the trends between the USD and Mexican peso from time to time, with the trends favoring the economy with the higher interest rate indicating growth and more economic activity.
2. Hawkish vs. Dovish
If you are a monetary policy enthusiast, you must have met Hawkish or Dovish economic attitudes at some point. The two concern a country's central bank's attitude toward inflation and growth.
A central bank that employs a restrictive monetary policy (Hawkish) reduces the currency supply in circulation, causing its value to appreciate in the forex market. On the flip side, an expansionary monetary policy (dovish) capitalizes on boosting the net money supply, causing an excess supply in the forex market, which may reduce its value. The Hawkish vs. Dovish attitudes greatly influence the trends between the U.S. dollar and the Mexican Peso in the forex.
3. Difference in Inflation
Inflation refers to the speed with which the cost of goods and services rises in an economy within a specified time frame, usually a month or a quarter. An upsurge in the inflation rate within an economy indicates that the prices of commodities are rising faster within such an economy. Even if the inflation rate takes a downward trend, the prices of goods and services still grow at a lagging pace.
The primary concern with inflation levels within an economy is its effects on the consumer's disposable income levels. Higher inflation means consumers' disposable income can only fetch a reduced volume of goods compared to when the prices were relatively lower. This will hurt demand and sales within the economy.
Anything that affects a country's economy has a net impact on the stability of its currency. This is why the inflation rate within the U.S. and Mexican economies will have a telling influence on the USD/MXN trends.
4. Current Account Deficits
A country's current account refers to the balance of trade (BOT) between the country and its trading counterparts. BOT is the discrepancy between a country's exports and imports of goods. A country is considered to have a balance of trade deficit when it spends more than it earns from foreign trade, borrowing foreign capital to compensate for the deficit.
A country with a current account deficit supplies more of its currency than the foreigners need to purchase its products, while it requires more foreign currency from its export sales. With an excess demand for foreign currency, the country's currency will be weaker until it can export much or produce goods cheaper enough for foreigners to buy.
The current deficit is, therefore, a crucial indicator, driving USD/MXN trends from time to time.
5. Public Debt Burden
It is hard for countries to avoid public debt, especially for the less developed economies. So, as a matter of practice, countries apply for massive deficit financing to fund public goods and government projects.
Unfortunately, as countries attract more public debt, they repulse foreign investors who could have pumped life into the economy. The public debt burden presents multiple risks, including inflation and a high potential for default. No economy would want to hold currencies that are not predictable and whose value may fall overnight.
In this case, the trends between USD/MXN are also influenced by the public burden between the U.S. and Mexico.
Conclusion
Numerous factors influence currency exchange rates. Many of these factors have much to do with the trading relationship between these two countries. In practice, the exchange rate is relative and, as expressed, compares the currencies of two countries.
Such factors as the base interest rates, difference inflation, and the monetary policy attitude embraced by a country's central bank influence the trends their currency takes in the forex market.
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