Mexican Peso under pressure ahead of expected Banxico rate cut

• Mexican Peso weakens as investors eye Banxico policy decision on Thursday.
• Mexico’s retail sales data indicate cautious consumer spending, setting stage for Banxico's potential 25 bps rate cut.
• Banxico rate cut may shrink US-Mexico rate gap, possibly nudging USD/MXN near 17.00.
• Decision might not be unanimous as Deputy Governors Espinosa and Heath expressed concerns over persistent inflation.

The Mexican Peso begins the session on the defensive against the US Dollar as investors prepare for the Bank of Mexico (Banxico) monetary policy decision. Most analysts expect a 25-basis-point rate cut, which would lower reference rates to 11.00%. The USD/MXN pair exchanges hands at a 16.74 for a gain of 0.4%.

Mexico’s economic docket featured retail sales for February, which improved on a monthly basis, yet suggests consumers are spending less. In the 12 months to January, sales missed estimates and plunged sharply. Later at 19:00 GMT, the Banxico Governing Council led by Governor Victoria Rodriguez Ceja will likely cut rates for the first time since mid-2021.

The decision is expected to be split, as two Deputy Governors, Irene Espinosa and Jonathan Heath, expressed their disagreement with easing policy, adding that inflation remains high and stubbornly stickier than expected. Although February’s inflation cooled from 4.88% to 4.40% and core figures decreased from 4.76% to 4.64%, external factors could trigger a second wave of inflation.

In the meantime, traders continued to digest the latest monetary policy decision by the Federal Reserve, which held rates unchanged and kept their projections for three 25 bps rate cuts toward year end. Although revising the federal funds rate (FFR) level upward to 3.9%, the Fed’s decision was perceived as dovish.

Given the backdrop, if Banxico lowers rates, that would decrease the interest rate spread between the US and Mexico, bolstering the USD/MXN, which could hit 17.00 following the decision.

Daily digest market movers: Mexican Peso weakens as reduction of rate differentials looms

• Mexico’s Retail Sales fell -0.6% MoM in January, missing estimates of 0.4% expansion but better than December’s data. Yearly figures plummeted from -0.2% to -0.8%, smashing projections for a 1.2% expansion.
• Mexico’s economic data released in the week:
  • Aggregate Demand rose by 0.3% QoQ in Q4, up from 0%. On an annual basis, it decelerated from 2.7% to 2.6%.
  • Private Spending on a quarterly basis slowed from 1.2% to 0.9%. On a yearly basis, it improved from 4.3% to 5.1%.
• The slowdown in Mexico’s economy is one of the main reasons that Banxico is eyeing the first cut. Mexico’s central bank expects the economy to grow 2.8% YoY in 2024, down from 3%, but maintains its 1.5% prior call for 2025.
• The US economic schedule revealed that Initial Jobless Claims for the week ending March 16 rose by 210K, below estimates of 215K and the prior week’s figures.
• S&P Global PMI figures for the United States were mixed, with Services and Composite PMI readings cooling but remaining in expansionary territory. The S&P Global Manufacturing PMI was the outlier, exceeding estimates of 51.7 and the previous reading of 52.2 by jumping to 52.5.
• Existing Home Sales rose by 9.5% from 4 million to 4.38 million.
• The latest inflation figures in the United States prompted investors to price in a less dovish stance. Money market futures have adjusted their rate cut expectations to be more in line with the Fed's as they foresee theFFR at 4.71% toward the end of the year. Analysts estimate the Fed will not change its FFR level until June or later.

Technical analysis: Mexican Peso treads water as USD/MXN accelerates to 16.80

As mentioned on Wednesday, “the USD/MXN is neutral to downwardly biased after buyers lifted the exchange rate to a weekly high of 16.94 before retreating beneath 16.80.”  However, with the Mexican Central Bank decision looming, a quarter percentage rate cut could lift the exotic pair and break key resistance levels.

The first resistance would be the March 19 cycle high at 16.94, followed by the psychological 17.00 figure. Up next would be a busy area of dynamic supply zones, led by the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.12 and the 200-day SMA at 17.20.

On the other hand, sellers must drag the exchange rate below the current year-to-date low of 16.64 before challenging last year’s low of 16.62.

USD/MXN Price Action – Daily Chart