The Mexican Peso (MXN) trades with marginal gains against the US Dollar (USD) on Thursday after dropping to three-week lows near 20.40 the previous day. A hawkish cut by the Federal Reserve (Fed) on Wednesday, combined with uninspiring data from Mexico, keeps the MXN on its back foot ahead of the Bank of Mexico’s (Banxico) monetary policy decision.
A poll of analysts released by Citibank revealed a widespread view that the Mexican central bank would follow the Fed’s steps and cut rates by 25 basis points (bps). The analysts underscore that the lower inflationary pressures and a softer economic outlook put pressure on Banxico to ease borrowing costs.
The Federal Reserve cut interest rates as expected, but its monetary policy statement and Chairman Jerome Powell´s press conference were tilted to the hawkish side. The central bank raised next year’s inflation and growth expectations and signaled a slower easing path.
USD/MXN has broken above the top of the last two weeks’ horizontal channel at 20.30 and is consolidating gains below the 20.40 area, with the December 2 high at 20.60 on sight.
Technical indicators show increasing bullish momentum, with price action above the 4-hour 100 Simple Moving Average (SMA) and the Relative Strength Index (RSI) still below overbought levels.
Support levels are at the top of the last two weeks’ channel at 20.30, ahead of the key 20.00 level. On the upside, resistances are at the mentioned 20.60, ahead of the November 6 and 26 highs at 20.80.
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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