Mexican Peso weakens as Banxico’s Governor opens the door to rate cuts

• Mexican Peso drops amid the lack of economic data, but remains inside the 17.00/17.60 range.
• Banxico to remain cautious despite easing policy for the next year commented its Governor Rodriguez Ceja.
• Federal Reserve officials pushed back against aggressive bets suggesting the central bank would cut rates twice its projections.

The Mexican Peso (MXN) registered losses of more than 0.40% against the US Dollar (USD) earlier in the North American session, as the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja crossed the wires. As portrayed by US equities, investors' appetite for risk remains positive, while Federal Reserve (Fed) officials have pushed back against the market’s aggressively pricing more than 100 basis points of rate cuts. The USD/MXN is trading at 17.26 after hitting a daily high of 17.77.

Mexico’s economic docket remains scarce, though Banxico’s Governor Rodriguez Ceja grabbed the headlines. She commented that inflation has fallen, but they remain cautious about when beginning to ease monetary policy. She added that they’re anticipating cutting rates “gradually.”

Daily digest market movers: Mexican Peso on the defensive amidst Banxico’s dovish comments

• Banxico’s Governor Victoria Rodriguez Ceja noted that if data supports the disinflationary process, they could ease monetary policy in the first quarter of 2024.
• Bank of Mexico's Governor added that despite reviewing their inflation projections for 2024, the central bank kept its forecast of inflation returning to its 3% target in 2025.
• Lastly, Victoria Rodriguez Ceja added the Governing Council considers several factors when determining its policy, including the exchange rate, though they’re not focused on a specific level.
• Banxico’s decision to keep rates unchanged last week was unanimously supported by its five members.
• The central bank acknowledged that inflation risks are tilted to the upside after November’s report witnessed headline inflation rising due to the “rise in non-core components” while core inflation eased.
• Banxico revised its inflation projections for some quarters of 2024 and 2025.
• US business activity picked up in December, according to S&P Global. The composite index, which combines manufacturing and services sectors, increased to 51, exceeding November’s 50.7 and hitting a five-month high.
• Federal Reserve official Raphael Bostic projects two rate cuts next year and a soft landing. Nevertheless, he added the US central bank must be resolute, and that rate cuts are not imminent.
• Aside from this, the New York Fed President John Williams pushed back against the idea of rate cuts, emphatically saying it’s “premature” to think about easing policy in March.
• Williams added that the question around the Fed board is whether the policy is sufficiently restrictive enough to ensure inflation returns to 2%.
• According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rates (FFR) to 4.60% in 2024, though they remain data-dependent.
• The fall in US Treasury bond yields, which are closely correlated to the Greenback (USD), has stalled, easing the pressure on the USD. The US Dollar Index (DXY) is virtually unchanged, falls 0.02%, up at 102.57.
• Money market futures estimate the Fed will slash rates by 140 basis points toward the end of next year, twice the Fed’s forecasts of three 25 bps cuts.

Technical analysis: Mexican Peso to remain rangebound at around 17.00-17.60

The USD/MXN is rangebound as the 100, 200, and 50-day Simple Moving Averages (SMAs) begin to converge toward the 17.41/58 area, almost shifting flat. As long as the exchange rate remains below them, it would remain slightly tilted to the downside, with the first support level seen at last week’s low of 17.14, ahead of dropping toward the 17.00/05 area.

On the other hand, if buyers reclaim the 100-day SMA at 17.41, the USD/MXN could rally toward the 200-day SMA at 17.51 in route to the 50-day SMA at 17.58. Once those levels are surpassed, further upside lies at the psychological 18.00 figure.