Mexican Peso edges higher against US Dollar despite speculation of Banxico policy shift

• Mexican Peso gains modestly as US Dollar weakens further despite pressure from rising US Treasury yields.
• Mexico's January trade deficit and potential Banxico rate cut speculation influence USD/MXN dynamics.
• Economic slowdown signs and CPI dip support Banxico's potential easing, hinting at upcoming volatility for the Peso.

Mexican Peso registers modest gains against the US Dollar as the latter remains weak, extending its losses to two straight days against a basket of six currencies, the so-called US Dollar Index (DXY). Nevertheless, a jump in US Treasury bond yields is capping the Peso’s advance, with the USD/MXN trading at 17.05, down 0.25%.

Mexico reported the Balance of Trade for January, which revealed the country posted a trade deficit of $302 million dollars, seasonally-adjusted, as announced by the National Statistics Agency (INEGI). The data failed to extend the USD/MXN losses amid speculation that the Bank of Mexico (Banxico) could ease monetary policy.

In an interview with El Economista, Pamela Diaz Loubet, BNP Paribas economist for Mexico, commented, “We maintain the forecast that they (Banxico) will apply a cut in March.” She said that in the latest minutes guidance for future actions, Banxico will surely explain that the March cut will be presented “to maintain flexibility and the gradual approach to cuts.”

The economic data in Mexico is expected to show an economic slowdown due to higher interest rates set by the Bank of Mexico (Banxico) at 11.25%. That, along with the latest report of the Consumer Price Index (CPI) dipping sharply for the first half of February, justifies the posture of three members of Banxico. The latest meeting minutes suggested that three policymakers are eyeing the first rate cut at the March meeting, which could put pressure on the Mexican Peso, opening the door for further upside on the USD/MXN exchange rate.

Across the border, US Durable Goods Orders plunged more than expected, while Home Prices reported by S&P/Case Shiller were mixed.

Daily digest market movers: Mexican Peso recovers as Banxico rate cut speculation grows

• Mexico posted a $302 million trade deficit in January when adjusted for seasonal swings.
• The latest inflation report in Mexico showed that headline and underlying inflation continued to dip toward Banxico’s goal of 3% plus or minus 1%, while economic growth exceeded estimates but finished below Q3’s 3.3%.
  • Mexico’s Consumer Price Index (CPI) in the first half of February was 4.45%, down from 4.9% YoY.
  • Mexico’s Core CPI slowed from 4.78% to 4.63% on an annual basis.
  • Mexico’s GDP for Q4 2023 exceeded estimates of 2.4% YoY and hit 2.5%, less than Q3 2023 print of 3.3%.
• Economic trade issues between Mexico and the US could depreciate the Mexican currency if the Mexican government fails to resolve its steel and aluminum dispute with the United States. US Trade Representative Katherine Tai warned the US could reimpose tariffs on the commodities.
• In January, US Durable Goods Orders significantly declined to -6.1% MoM, exceeding the anticipated contraction of -4.5% and marking a steeper fall compared to December's -0.3% decrease.
• In December, the S&P/Case-Shiller Home Price Index indicated a monthly decline of -0.3%, a slight acceleration in the contraction pace from November's -0.2%. On an annual basis, home prices rose by 6.1%, surpassing both expectations and the growth rate from the previous month.
• The last meeting minutes of the US Federal Reserve (Fed) showed that policymakers remain hesitant to cut rates amid fears of a second round of inflation. They have expressed willingness to adjust policy when necessary but remain cautious, indicating no urgency to act. This stance is supported by current economic data suggesting strength in the economy, which could potentially revive inflationary pressure.
• Market players had trimmed the odds for the first 25 basis point (bps) rate cut in June, with odds lying at 53%, while 36% of investors expected the Fed to keep rates unchanged at the current level of 5.25%-5.50%.

Technical analysis: Mexican Peso stays firm as USD/MXN meanders around 50-day SMA

The USD/MXN slid below the 17.10 area, hoovering around the 50-day Simple Moving Average (SMA) after posting back-to-back days of losses. Even though the pair dipped to a three-day low at 17.04, it remains trading sideways, awaiting a fresh catalyst to gather direction.

 If sellers drag the spot price below the 17.00 figure, that will pave the way to test the current year-to-date low of 16.78, followed by the 2023 low of 16.62. Otherwise, buyers moving in could lift the USD/MXN above 17.10, followed by the psychological 17.20 figure, ahead of key resistance levels seen at the 200-day SMA at 17.26 and the 100-day SMA at 17.33.

USD/MXN Price Action – Daily Chart