Mexican Peso (MXN) stages a comeback against the US Dollar (USD) as the last month of the year begins, even though the Greenback posts solid gains against a basket of six currencies, namely the US Dollar Index (DXY). The USD/MXN slips below the confluence of technical support levels, which turned resistance, and trades below 17.30, down 0.71% on the day.
The Mexican currency had a positive month in November, posting gains of 3.65%, a solid recovery compared to October's 3.60% losses. The main driver for price action continues to be interest rate differentials between both countries, with 600 basis points of spread favoring the Mexican Peso. In addition, market participants seem confident the US Federal Reserve (Fed) ended its tightening cycle after previously “hawks” members delivered dovish remarks. In the meantime, the release of the Fed’s preferred gauge for inflation, the Core Personal Consumption Expenditures (PCE) Price Index, showed the disinflationary process in the US continued. USD/MXN traders are eyeing the Fed Chairman Jerome Powell's speech at 16:00 GMT.
On the Mexican front, the Bank of Mexico (Banxico) revised its economic projections for 2023 and 2024, saying that inflation would reach its 3% target in 2025. Governor Victoria Rodriguez Ceja said discussions to ease monetary policy could begin in the first quarter of 2024. Deputy Governor Jonathan Heath emphasized the bank would be data-dependent and deliver gradual rate cuts. Ahead into the calendar, S&P Global would release the Manufacturing PMI.
The USD/MXN resumed its downtrend after briefly piercing above the 20 and 100-day Simple Moving Averages (SMAs) at 17.32 and 17.34, respectively, and reaching a two-week high shy of 17.50. Nevertheless, buyers were unable to cling to gains, and the pair has returned back below the 20 and 100-day SMAs.
For a bearish continuation, the exotic pair needs to break below 17.25, a solid resistance level during the week that turned support. Once breached, the next support would be 17.05, ahead of the psychological 17.00 figure. If bulls regain the 20-day SMA, that could open the door for USD/MXN to reclaim the 100-day SMA at 17.34, ahead of challenging 17.50.
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.
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.
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.
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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