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- Mexican Peso dives in anticipation of Mexico’s GDP report
Mexican Peso dives in anticipation of Mexico’s GDP report
- Mexican Peso weakens, USD/MXN rises 0.36%, as markets anticipate Fed policy decision.
- Lowered expectations for Fed rate cut, Middle East tensions drive Peso down, Dollar up.
- Investors focus on Jerome Powell's speech for clues on Fed's future monetary policy direction.
The Mexican Peso (MXN) begins this week on the back foot for the third consecutive week against the US Dollar (USD) as traders remain cautious ahead of the US Federal Reserve’s (Fed) monetary policy decision. Investors reducing bets the Fed will cut rates in March, along with geopolitical tensions in the Middle East, keep risk-perceived currencies weak, boosting the safe-haven status of the Greenback. Therefore, the USD/MXN exchanges hands at 17.21, up 0.36%.
USD/MXN traders are bracing for the Fed’s decision on Wednesday. Expectations suggest the US central bank will keep rates on hold, and according to recent statements by some policymakers, discussions about quantitative tightening (QT) could emerge at the next meeting. However, market participants are looking to Fed Chairman Jerome Powell’s first appearance of the year on the stand. In December, Powell shifted more dovish, which was followed by Fed officials pushing back against aggressive speculation that the Fed would ease policy aggressively. Traders estimate that Powell will take a more balanced approach on Wednesday.
Daily Digest Market Movers: Mexican Peso to extend its weekly losses, ahead of Fed decision
- Ahead in the week, Mexico’s economic docket will reveal the Gross Domestic Product (GDP) preliminary reading for 2023’s last quarter, with estimates on a quarterly basis down at 0.3% from 1.1% in Q3. The consensus projects yearly figures down from 3.3% at 3%.
- The Mexican Peso could remain bullish as data suggests inflation remains above target even though underlying numbers slipped below the 5% threshold for the first time. That, along with the latest strong labor market report, indicates economic strength. With risks for inflation remaining tilted to the upside, that could prevent the Bank of Mexico (Banxico) from cutting rates.
- On the bearish front, two of Banxico’s Governors, one involving Governor Victoria Rodriguez Ceja, opened the door to ease policy in the first quarter of 2024, which could weigh on the Peso as the interest rate differential between Mexico and the US would shrink. The economy losing pace due to an upcoming slowdown in the US and geopolitical risks are a headwind for the Mexican currency.
- Last week’s data featured Mexico’s Trade Balance hitting a surplus in December, while Economic Activity shrank in November. On the data front, the Unemployment Rate dropped, signaling the labor market remains robust.
- 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.
- Across the border, the US economy remains resilient, as GDP in Q4 of last year crushed forecasts despite easing from Q3’s 4.9%. That could force Fed officials to refrain from easing policy, but the latest inflation data suggests they’re close to getting inflation to its 2% target.
- Nevertheless, mixed readings in other data suggest that risks have become more balanced. That is reflected by investors speculating that the Fed will cut rates by 139 basis points during 2024, according to the Chicago Board of Trade (CBOT) data.
Technical Analysis: Mexican Peso drops sharply as USD/MXN bounces off 50-day SMA
The USD/MXN price action on Monday has edged to the upside sharply with the risks of taking the bears out of the picture. A bullish engulfing chart pattern on the daily chart is putting the 200-day Simple Moving Average (SMA) at 17.34 back into play. Once that level is taken out, the 100-day SMA at 17.41 would be up next, followed by the December 9 high at 17.56, ahead of the May 23 high from last year at 17.99.
Conversely, if sellers step In, they must drag the USD/MXN exchange rate toward the 50-day SMA at 17.13. A decisive break will expose the January 22 low at 17.05, followed by the 17.00 psychological level.
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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