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- Mexican Peso on the defensive ahead of the Fed’s decision
Mexican Peso on the defensive ahead of the Fed’s decision
- Mexican Peso opens the session soft as traders trim positions awaiting Powell and Co.
- Prices paid by producers in the US cooled down, adding to the dovish narrative around the Federal Reserve.
- USD/MXN could aim towards 18.00 if the Fed delivers a hawkish message.
Mexican Peso (MXN) weakened against the US Dollar (USD) early during the North American session on Wednesday, with traders bracing for the release of the US Federal Reserve’s (Fed) monetary policy decision. Speculations suggest the Fed will keep rates unchanged, but “some” uncertainty surrounds Chair Jerome Powell’s press conference. At the time of writing, the USD/MXN is trading at 17.40, gaining 0.58% on the day.
Mexico’s economic docket remains scarce, yet on Thursday, the Bank of Mexico (Banxico) will announce its verdict on monetary policy and is expected to keep rates unchanged. The latest Mexican economic indicators show the economy remains resilient, with inflation above the central bank’s target. In addition, PMIs remained at expansionary territory, and Industrial Production smashed estimates, portraying an optimistic economic outlook for the country.
Daily digest movers: Mexican Peso at the mercy of the Federal Reserve
- The USD/MXN main driver for the day will be the Fed’s decision, but traders' focus will be on the Summary of Economic Projections (SEP) and the dot plot.
- In September, the SEP showed that most Fed officials estimate the federal funds rate (FFR) to be at around 5.6% by the end of 2023. If policymakers keep the projections unchanged, that could be perceived as hawkish, and the USD/MXN could aim higher.
- Fed Chair Powell is expected to push back against speculations of looser monetary policy. Instead, he would stick to its previous stance of “we are prepared to tighten policy further if it becomes appropriate to do so.”
- The US Producer Price Index (PPI) inflation for November dipped in annual and monthly readings, in contrast to consumer inflation, which delivered mixed readings. The core Consumer Price Index (CPI) stands stubbornly at around 4%.
- Money market futures estimate the Fed will slash rates by 113 basis points toward the end of next year.
- A Reuters poll showed that 23 of 25 analysts expect the Bank of Mexico would keep rates at 11.25% unchanged, while one estimates a rate cut to 11%. Annual inflation ticked up to 4.32% in November, though it didn’t dent policymakers' intentions to ease policy next year if data confirms the disinflation process.
Technical analysis: Mexican Peso loses a step as the USD/MXN rises toward the 100-day SMA
The USD/MXN is neutral to upward biased despite sitting below key technical levels, like the 100, 200, and 50-day Simple Moving Averages (SMAs). Given the fundamental backdrop, if the Fed struck a hawkish message, the pair could rally and break each of the previously mentioned levels at 17.40, 17.54, and 17.64, respectively. Once cleared, the next resistance level would be the psychological 18.00 figure.
On the other hand, failure to reclaim the 100-day SMA could see sellers drag prices toward the 17.20 area, ahead of a strong demand region at around the 17.00/05 range. Once hurdled, the USD/MXN could test the year-to-date (YTD) low of 16.62.
Mexican Peso FAQs
What key factors drive the Mexican Peso?
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
How do decisions of the Banxico impact the Mexican Peso?
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
How does economic data influence the value of the Mexican Peso?
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
How does broader risk sentiment impact the Mexican Peso?
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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