Mexican Peso soars to seven-week high on weak US Dollar amid soft US economic data

• Mexican Peso strengthens, marking over 0.5% weekly gain as USD/MXN reaches a new seven-week low at 16.91.
• US ISM Services PMI for February indicates a slowing economy, fueling speculation of forthcoming Federal Reserve rate cuts.
• US Dollar Index dips slightly as market participants increasingly anticipate a potential policy shift by the Fed toward easing interests by year-end.

The Mexican Peso appreciates sharply against the US Dollar, extending its weekly gains to more than 0.5% as the USD/MXN plunges sharply below the 17.00 figure, falling to a seven-week low. Economic data from the United States (US) showed the economy is slowing and weighed on the Greenback as the Federal Reserve’s (Fed) rate cut speculations grew. The USD/MXN trades at 16.91, down 0.21%.

Mexico’s economic docket was empty on Tuesday, but one day ago a report by the National Statistics Agency (INEGI) showed that Gross Fixed Investment in December remained flat MoM. Nevertheless, on an annual basis, it dipped from 19.2% to 13.4%.

In the US, the latest Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) revealed that the sector cooled down in February, spurring worries about an economic downturn. Therefore, investors had begun to readjust their expectations of possible Fed interest rate cuts toward the end of the year. Consequently, the US Dollar Index (DXY), which tracks the buck’s value against a basket of six currencies, dropped 0.06% to 103.77.

Daily digest market movers: Mexican Peso boosted by broad US Dollar weakness

• A Reuters poll shows 15 analysts estimate that inflation will slow down in February, corroborating bets that the Bank of Mexico (Banxico) could cut rates as soon as the March 21 meeting.
• The survey showed that the Consumer Price Index (CPI) is expected to dip from 4.88% to 4.42%, while underlying CPI is seen falling to 4.62%, its lowest level since June 2021.
• Mexico’s General Election campaign started on March 1. Polls suggest the ruling party’s nominee, Claudia Sheinbaum, maintains her lead over Xochitl Galvez. Parametria’s poll shows Sheinbaum's support at 49%, while Galvez, the opposition candidate, stands at 29%.
• Banxico’s February private analysts poll projections for 2024:
  • General inflation is foreseen at 4.10%, while underlying inflation is expected at 4.06%.
  • The economy is expected to grow 2.40%, unchanged from January.
  • The USD/MXN exchange rate would end the year at 18.31, down from 18.50.
  • Interest rates are expected to be lowered from 11.25% to 9.50%.
• During Banxico’s quarterly report, policymakers acknowledged the progress on inflation and urged caution against premature interest rate cuts. Governor Victoria Rodriguez Ceja said adjustments would be gradual, while Deputy Governors Galia Borja and Jonathan Heath called for prudence. The latter specifically warned against the risks of an early rate cut.
• Banxico updated its economic growth projections for 2024 from 3.0% to 2.8% YoY and maintained 1.5% for 2025. The slowdown is blamed on higher interest rates at 11.25%, which sparked a shift in three of the five governors of the Mexican Central Bank, who are eyeing the first rate cut at the March 21 meeting.
• 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%.
• 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.
• US economic data hurts the prospects for a higher USD/MXN, with buyers failing to keep the exchange rate above the 17.00 figure.
• US Factory Orders plunged from -2.9% MoM to -3.6% in January.
• The ISM Services PMI in February was 52.6, below estimates of 53 and January’s 53.4.
• The CME FedWatch Tool shows traders are expecting 99 basis points of rate cuts by the Fed in 2024.

Technical analysis: Mexican Peso rallies as USD/MXN tumbles below 17.00

The USD/MXN resumed to the downside after achieving a daily close below the 17.00 figure on Monday, sponsoring a leg down toward the seven-week low of 16.89. Further downside is seen at the current yearly low of 16.78, followed by last year’s 16.62.

On the other hand, if buyers reclaim the 17.00 figure, that could open the door to testing the 50-day Simple Moving Average (SMA) at 17.06, followed by the 200-day SMA at 17.24.

USD/MXN Price Action – Daily Chart