Mexican Peso extends rally as inflation cools, hinting at Banxico easing

• Mexican Peso strengthens as November inflation decreases, suggesting potential for continued rate cuts.
• Banxico Governor adopts cautious stance on aggressive rate cuts despite lower inflation.
• Upcoming economic releases include Mexican Consumer Confidence and US CPI with markets watching for further cues on monetary policy.

The Mexican Peso extended its rally for the fifth consecutive day as inflation in Mexico dipped to its lowest level since April 2024. Even though this suggests the Bank of Mexico (Banxico) might continue its easing cycle, the USD/MXN dropped 0.06% and traded at 20.14 at the time of writing.

Mexico’s economic docket revealed that headline and core inflation in November missed estimates, edging lower after the Consumer Price Index (CPI) hit its highest level of 5.57% in July, according to the Instituto Nacional de Estadistica Geografia e Informatica (INEGI).

Last week, Banxico Governor Irene Espinosa was hawkish, saying, "At this point, too many things need to change to be able to believe that the conditions are right for a much more aggressive move." Her statement followed a query about the possibility of a cut of more than 25 points.

Across the border on Friday, the latest US Nonfarm Payrolls (NFP) report in November was stellar. The economy added 227K jobs to the workforce, exceeding estimates of 200K, though the Unemployment Rate ticked up from 4.1% to 4.2%.

Federal Reserve (Fed) officials have begun their blackout period before the December 17-18 monetary policy meeting. Policymakers failed to provide any hints regarding the meeting with most supporting a gradual approach. They are awaiting November’s Consumer Price Index (CPI) data on December 11.

This week, Mexico’s economic docket will feature Consumer Confidence and Industrial Production data. In the US, the Consumer Price Index, the Producer Price Index, and Initial Jobless Claims data will also entice traders.

Daily digest market movers: Mexican Peso shrugs off soft inflation, appreciates

• Mexico’s headline inflation dipped from 4.76% to 4.55% YoY, below forecasts of 4.60%, its lowest level in eight months.
• Core figures showed an improvement of the disinflation process with November edging lower from 3.80% to 3.58%, below projections of 3.6%.
• “Mexican inflation continues to decline slightly and underlying pressures are under control. We believe that the headline CPI will increase by around 0.5% monthly in December, and that the annual rate will close 2024 at 4.4%,” explained Andrés Abadía, chief economist for LATAM at Pantheon Macroeconomics.
• Banco Base Economist Gabriela Siller said, "The Bank of Mexico is expected to cut interest rates by 25 basis points on Dec. 19. For 2025, inflation is expected to slow down to close the year at 4.1%, and the Bank of Mexico will cut the interest rate to 8.5%."
• Money market futures price in 90% odds that the Fed will lower borrowing costs by 25 basis points this month, according to the CME FedWatch Tool.
• Banxico’s November survey shows that analysts estimate Mexican inflation at 4.42% in 2024 and 3.84% in 2025. Underlying inflation figures will remain at 3.69% in 2024 and 2025. GDP is forecast at 1.55% and 1.23% for 2024 and 2025, respectively, and the USD/MXN exchange rate at 20.22 for the rest of the year and 20.71 in 2025.

Mexican Peso technical outlook: USD/MXN drops below 20.20 on Peso strength

The USD/MXN dipped as low as 20.09 last Friday, near the 50-day Simple Moving Average (SMA) at 20.00. Momentum shifted to the downside as the Relative Strength Index (RSI) turned bearish, indicating that the exotic pair could test the 20.00 mark.

In that outcome, the next support would be the 100-day SMA at 19.61 before testing the psychological 19.50 mark, ahead of the 19.00 figure. Otherwise, if USD/MXN climbs above the December 6 high of 20.28, that could pave the way to challenge 20.50, ahead of the year-to-date peak at 20.82, followed by the 21.00 mark.