Mexican Peso recovers slightly amid Banxico’s hawkish stance on interest rates

• Mexican Peso regains ground, trading at 16.98 against the US Dollar following Banxico Deputy Governor's comments on maintaining high rates.
• Banxico Deputy Governor Jonathan Heath indicates possible "fine adjustments" to interest rates to combat persistent inflation.
• Fed Chair Jerome Powell hinting at prolonged high US rates due to stagnant inflation progress.

The Mexican Peso trims some of its losses against the US Dollar, but it’s not out of the woods despite remarks from Bank of Mexico (Banxico) Deputy Governor Jonathan Heath suggesting that rates would likely need to remain higher.

That and an improvement in risk appetite was a relief for the Mexican currency, which weakened to levels last seen in February 2024. The USD/MXN trades at 16.99, down 0.47%.

During an interview with Banorte’s Podcast, Heath said the central bank would likely make “fine adjustments” to the main reference rate to ensure “that the restrictive monetary stance remains at these levels for as long as necessary until we see progress on inflation.”

He added that although inflation’s downward trajectory remains in place, it stalled near the 4.4% threshold for five months. Heath added that “prices of services” are to blame for inflation's stickiness.

Across the border, Heath’s colleague, Fed Chair Jerome Powell, said rates could remain higher for longer in remarks at the Wilson Center on Tuesday. Powell said that the lack of progress on inflation would likely require keeping rates steady for “as long as needed.”

Daily digest market movers: Mexican Peso underpinned by Heath comments

• Mexico’s economic docket remains absent, though February’s Retail Sales report for February is scheduled for April 19.
• On Tuesday, the International Monetary Fund (IMF) updated its expectations for economic growth in Mexico, from 2.7% to 2.4% in 2024 and from 1.5% to 1.4% in 2025. The IMF reduced its 2025 forecast, arguing that the fiscal expansion that will drive progress this year will be reversed in the next year because the new administration will have to tighten its belt, reversing existing spending policy.
• US economic data revealed during the week suggests the economy remains solid. A better-than-expected Retail Sales report for February, along with firm Industrial Production, overshadowed weaker-than-expected housing figures on Wednesday.
• Powell added, “Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”
• Geopolitical tensions in the Middle East would likely weigh on the Mexican currency.  USD/MXN traders must be aware that any escalation could prompt traders to ditch the Mexican Peso and buy US Dollars.
• US Treasury yields are sliding close to eight basis points (bps) in the belly and long end of the yield curve. That underpins the Greenback, which is up a modest 0.09% at 106.17 on the DXY.
• Data from the Chicago Board of Trade (CBOT) suggests that traders expect the Fed funds rate to finish 2024 at 4.95%, down from 4.97% a day ago.

Technical analysis: Mexican Peso cuts some losses but remains pressured

The USD/MXN daily chart suggests the pair shifted to a neutral/upward bias as the Mexican currency tumbles and depreciates past the 17.00 figure. However, buyers must keep the pair above the 100-day Simple Moving Average (SMA) at 16.97, to remain hopeful of higher prices. That would the 17.00 figure in sight, followed by the current weekly high of 17.08. Once surpassed, the next stop would be the 200-day SMA at 17.16, followed by the January 17 high at 17.38, before testing the 17.50 psychological level.

On the other hand, if USD/MXN slides below 16.97, look for a pullback toward last year’s low of 16.62, followed by the April 12 low of 16.40.