The Mexican peso has been extending its recovery over the last three months after cratering in March. Despite the Mexican economy being ravaged by the COVID-19 pandemic, confidence in global financial markets has spawned risk appetite for currencies like the peso and Brazilian real. How much momentum does the peso’s rally have in the second half of 2020?

Mexico has not been able to resuscitate its manufacturing industry. The latest IHS Markit manufacturing purchasing managers’ index (PMI) edged up to 38.6 in June, up from 38.3 in May – anything below 50 indicates a contraction. This represented the fourth straight month of a contraction amid shrinking output, new orders, and export sales.

Business confidence has slightly improved, but it is still relatively subdued. The government’s seasonally adjusted manufacturing confidence index jumped to 38.6 last month, up from 35.5 in the previous month. This was the best reading since March, but sentiment over the economy, private investment, and the company’s situation was still low.

Overall, IHS Markit warns that foreign demand will be critical to the Mexican economy.

Going forward, demand will be the key driver in any recovery on the new orders index in the coming months. Only when demand begins to rebound will the Mexican manufacturing sector see a sustained rise in output.

According to the Bank of Mexico, foreign exchange reserves surged to more than $197 million in May, up from a little more than $196 million in April. This was the fourth consecutive month of rising forex reserves.

Next week, gross fixed investment, automobile production and exports, inflation, and industrial output data will be released.

Mexico has become a hotspot for the coronavirus, with 240,000 confirmed cases and more than 29,000 deaths. On Thursday, it reported an additional 6,741 cases, and there are no signs that infections are slowing down. The country had been slow to respond to the public health crisis, resulting in the spike in cases.

The USD/MXN currency pair was unchanged due to the Fourth of July long weekend, but it finished the week at 22.6258. The EUR/MXN edged up 0.04% to 25.4438, from an opening of 25.4235, at 18:23 GMT on Friday.