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- Mexican Peso slides amid Powell’s hawkish comments
Mexican Peso slides amid Powell’s hawkish comments
- Mexican Peso begins the week on the back foot, driven by Fed Chair Jerome Powell disregarding Mexico's quiet Constitution Day shifts focus to inflation data and Banxico's upcoming rate decision.
- US's strong Services PMI and Nonfarm Payrolls hint at the Fed's achievable soft-landing.
- Expectations lean towards Banxico holding rates at 11.25%, with eyes on Fed speakers for more insights.
The Mexican Peso loses ground against the US Dollar (USD) courtesy of Federal Reserve Chairman Jerome Powell's interview during the weekend, sponsoring a jump in US Treasury bond yields. Along with a holiday in Mexico, that boosts the Greenback amid a risk-off impulse. At the time of writing, the USD/MXN exchanges hands at 17.21, up 0.51%.
Mexico´s economic docket is empty due to Mexico’s Constitution Day observance. This week, inflation data will be released on Wednesday, followed by the Bank of Mexico (Banxico) monetary policy decision, on Thursday. Rates are expected to remain unchanged at 11.25%.
In the meantime, the US economy continues to shine as the release of Services PMI by S&P Global and the Institute for Supply Management (ISM) showed that business activity is improving. That, along with last Friday's US Nonfarm Payrolls data, increases the odds of the Fed achieving a soft landing.
Meanwhile, some Federal Reserve speakers had begun to cross the wires following the Fed’s decision last Wednesday.
Daily digest market movers: Mexican Peso on the defensive ahead of Banxico’s decision
- Inflation in Mexico would be featured on Thursday before Banxico´s decision. The Consumer Price Index (CPI) in December was 4.66% YoY, and core CPI stood at 5.09% year-over-year.
- US S&P Global Services PMI came at 53.4, exceeding estimates and the previous reading, while Composite was 52, up from 50.9.
- The ISM Non-Manufacturing PMI, also known as services, edged up from 50.5 to 53.4, exceeding estimates.
- S&P Global confirmed Mexico´s BBB foreign currency rating and BBB+ local currency long-term debt rating.
- S&P Global affirmed that stable macroeconomic conditions, with a real growth in Gross Domestic Product above 3% in 2023 that is supported by solid domestic demand and moderating inflation, prepare the way for the general elections in June.
- Minnesota Fed President Neil Kashkari commented that a strong economy means the Fed is in no hurry to make interest rate cuts. Kashkari acknowledged that inflation is making “rapid progress” towards the Fed’s 2% target and added that policy could not be sufficiently restrictive.
- Chicago’s Fed President Austan Goolsbee noted that inflation could remain falling amid a strong US economy,
Technical Analysis: Mexican Peso weakens further as USD/MXN buyers target 17.20
The USD/MXN is neutral-biased and jumped off the 50-day Simple Moving Average (SMA) at 17.13, though it has fallen short of reclaiming the 200-day SMA at 17.32. A daily close above the 17.20 strong resistance buyers could challenge the 200-day SMA, followed by the 100-day SMA at 17.40. Further upside lies at the 17.50 figure.
On the other hand, if sellers drag prices below the 50-day SMA at 17.13, look for a challenge of the February 2 daily low at 17.03, before slumping to 17.00.
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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