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- Mexican Peso on the offensive as Mexico’s inflation escalates
Mexican Peso on the offensive as Mexico’s inflation escalates
- Mexican Peso up, USD/MXN down nearly 1% as unexpected high inflation in Mexico may hinder Banxico’s easing policy plans.
- INEGI reveals mixed Mexican economy: Rising inflation, shrinking monthly activity, yet core prices stabilizing.
- US business activity strengthens, marked by a surge in the manufacturing index and easing inflation pressure, could underpin USD/MXN.
The Mexican Peso regains its momentum on Wednesday, rising against the US Dollar after economic data from Mexico suggests inflation is reaccelerating. This could deter the Bank of Mexico (Banxico) from easing policy rates. That along with a drop in US Treasury yields weighing on the Greenback keeps the USD/MXN trading with losses of almost 1%, at 17.14, testing a key support level ahead of the 17.00 figure.
The National Statistics Agency (INEGI) in Mexico revealed that inflation in the first 15 days of January was above forecasts and exceeded December’s print. Meanwhile, core prices continued to ease, signaling a continuation of the disinflation process. At the same time INEGI revealed that Mexico’s economy shrank in November, more than in October on a monthly reading, while expanding below forecasts on an annual basis.
Across the border, S&P Global announced that business activity picked up sharply in the US The manufacturing index surprisingly returned to expansionary territory and kept inflation in check as prices cooled down.
Daily Digest Market Movers: Mexican Peso strengthens as inflation exceeds forecasts
- Mexico’s mid-month inflation rose by 0.49%, exceeding forecasts of 0.38% but below December’s 0.59%, while underlying prices stood as expected at 0.25%, an improvement compared to the 0.46% print last December.
- Annually based, general inflation rose 4.9%, above forecasts and the prior’s month 4.46%, while core inflation cooled from 5.19% to 4.78%, as foreseen.
- Economic Activity in November shrank -0.5%, lower than forecasts and October’s -0.1% contraction, on a monthly basis. Annual figures dropped from 4.2% to 2.3%, below forecasts of 3.2% growth.
- The economy in Mexico is beginning to show the impact of high rates set by Banxico at 11.25%, even though most analysts estimate the economy will grow above 2% in 2024. Nevertheless, retail sales missing estimates, the economy growing below 3% in November, and inflation reaccelerating puts a stagflationary scenario in play.
- US S&P Global Composite PMI for January came in at 52.3, up from 50.9 in December, while the Manufacturing Index improved from 47.9 to 50.3. The Services Index advanced to 52.9 from 51.4.
- On the US front, last week’s economic data paints a soft-landing outlook. Even though housing data has remained mixed, improving American household sentiment , lower inflation expectations and business activity gathering steam could underpin the USD/MXN in the near term.
- Traders trimmed their bets for a dovish Federal Reserve in 2024. They stand at 139 basis points (bps) of cuts from 175 bps last week.
- Despite indications from the December meeting minutes of Banxico (the Central Bank of Mexico) that it may consider easing its monetary policy, the inflation report for January poses a potential obstacle to any such policy relaxation.
- Standard Chartered analysts estimate the Bank of Mexico (Banxico) will lower rates to 9.25% in 2024.
- On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.
Technical Analysis: Mexican Peso climbs to two-day high as USD/MXN drops toward100-day moving average
The USD/MXN erased Tuesday’s gains on Mexico’s economic data releases. Therefore, the exotic pair failed to breach the 200-day Simple Moving Average (SMA) at 17.36, extending its losses toward the 50-day SMA at 17.14. Next support is seen at 17.05, the January 22 low, followed by the 17.00 psychological figure.
On the other hand, if buyers lift the exchange rate past the 17.20 area, that could pave the way to retest the 200-DMA, followed by the 100-day SMA at 17.42. A breach of the latter will expose the psychological 17.50 mark, ahead of rallying to the May 23 high from last year at 17.99.
USD/MXN Price Action – Daily Chart
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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