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Smith

USD/MXN

Question

The USD/MXN pair doesn't seem so popular yet the Mexican peso is the western hemisphere's third most frequently traded currency after the USD and the Canadian dollar. Can someone shed some light about this pair?

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Hi Smith,
Mexico and the U.S are neighbors, and they have close ties as trade partners. That is, Mexico is the third-largest import source and the second-largest export market to the U.S.  Their physical proximity and trade relationship play a role in the strength of USD and MXN. And that makes USD/MXN forex pair very liquid in the global market. USD, the most widely used reserve currency globally, ranks position one in global liquidity. MXN is closely behind at position eight. 
In terms of the GDP purchasing power parity, the U.S. rank as the largest single nation economy, and Mexico isn't far behind at position 12th. 
Though not extensively used outside of Mexico, the Mexican peso is the third most commonly traded currency from the western hemisphere (behind USD and the Canadian dollar) and the 11th most commonly traded currency in the global market of Forex.
In Forex, USD features among the major pairs, including EUR/USD, USD/JPY, GBP/USD, and USD/CHF. MXN pair with USD doesn't attract as much attention as the major pairs involving USD. However, being ranked as the ninth most traded currency pair in the global Forex market, MXN provides liquid access to the Latin American market. 
Unlike the USA's low-interest rate of 2%, Mexico has a higher interest rate (8%), making the Mexican peso have higher returns than USD hence attracting more carry traders. Carry traders borrow from low-interest rates countries and invest it in higher interest rate markets like Mexico.
Since Mexico is the ninth-largest oil producer in the world, the Mexican peso is greatly influenced by the oil prices thanks to its vast oil reserves. That means Mexico peso gains value when oil prices go up and lose value when the oil market crashes. However, USD often benefits when the oil price lowers. 


 

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