Mexican Peso advances against US Dollar amid mixed US economic indicators

• Mexican Peso strengthens with USD/MXN targeting 17.00 level following divergent US manufacturing reports.
• Mexico's Business Confidence slightly falls, yet solid US business activity could impact Banxico's easing timeline.
• Analysts predict inflation pressure and economic slowdown in Mexico amidst election campaign developments.

Mexican Peso begins Friday’s session with solid gains against the US Dollar after economic data from the United States (US) was mixed. Business activity in the manufacturing sector was reported positively by S&P Global, while the Institute for Supply Management (ISM) suggests the economy is contracting. The USD/MXN is falling 0.24%, trading at 17.01, with sellers eyeing the 17.00 figure.

Mexico’s economic docket revealed that Business Confidence in February dipped a tenth lower than in January, though market participants ignored it. S&P Global revealed that business activity remains solid, which could deter Bank of Mexico (Banxico) officials from easing policy as soon as the March meeting.

Banxico’s poll shows that private sector analysts expect headline and core inflation will remain above the Central Bank’s target. They estimate a slowdown in the economy and foresee 175 basis points of monetary policy easing toward the end of 2024.

Meanwhile, Mexico’s General Elections campaign started on March 1. Polls suggest the ruling party’s nominee, Claudia Sheinbaum, maintains her lead over Xochitl Galvez. Parametria’s poll sees Sheinbaum's support at 49%, while Galvez, the candidate of the opposition, stands at 29%.

Aside from this, the US docket reveals a deceleration in business activity after a slew of Federal Reserve speakers crossed the wires.

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

• Mexico’s Business Confidence in February was 54.3, down from 54.4, the National Statistics Agency (INEGI) revealed.
• Mexico’s S&P Global February Manufacturing PMI rises to 52.3 from 50.0 in January.
• Banxico’s February private analysts poll projections for 2024:
  • General inflation is foreseen at 4.10%, while underlying 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.
• Mexico’s economy is expected to slow down due to higher interest rates set by Banxico at 11.25%. That’s the main reason that 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%.
• Mexico’s economic data released during the week thus far:
  • The Unemployment Rate rose from 2.6% to 2.9% YoY in January, exceeding estimates of 2.8%.
  • The Balance of Trade for January revealed the country posted a trade deficit of $302 million.
  • 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.
• S&P Global revealed that manufacturing activity in February in the United States *US( expanded sharply, with the PMI edging up from 50.7 to 52.2. Later, the Institute for Supply Management (ISM) reported that February Manufacturing PMI came at 47.8, below estimates of 49.5 and January’s 49.1.

Technical analysis: Mexican Peso climbs as USD/MXN hovers below 50-day SMA

The USD/MXN has edged lower and hovers around the 17.00 figure, threatening to extend its losses below the latter. Momentum favors sellers, as depicted by the Relative Strength Index (RSI) standing in bearish territory. If they reclaim 17.00, the first support would be the year-to-date low of 16.78, followed by the 2023 low of 16.62.

Conversely, if buyers keep the exchange rate above 17.00, that will keep them hopeful for higher prices, though they must reclaim the 50-day Simple Moving Average (SMA) standing at 17.06. A breach of the latter will expose the 17.20 area, followed by the 200-day SMA at 17.25 and the 100-day SMA at 17.30.

USD/MXN Price Action – Daily Chart