- Mexican Peso drops as a reflection of investor reaction to upbeat US manufacturing figures and a surge in Treasury yields.
- Mexico’s manufacturing sector shows stability, but stronger US economic outlook overshadows domestic positive data.
- Despite interest rate differential favoring Mexican Peso, hints emerge of possible Banxico rate cuts.
The Mexican Peso begins the week on a lower note versus the US Dollar, tumbling 0.57% after strong economic data from the United States (US) that could prevent the Federal Reserve (Fed) from cutting borrowing costs. That and a softer manufacturing activity report in Mexico kept the Greenback bid against the emerging market currency. The USD/MXN trades at 16.65, up 0.62%.
Mexico’s S&P Global Manufacturing PMI came at 52.2, virtually unchanged from 52.3 in February. Pollyanna de Lima, economic associate director at S&P Global, said, “Mexico’s manufacturing sector expanded further in March, underpinned by a solid rise in domestic new orders as pending contracts continued to get the green light. This buoyant client appetite had positive impacts on factory production, buying levels and employment.”
Across the border, the Institute for Supply Management (ISM) revealed that manufacturing activity expanded for the first time in the US since September 2022, while an index of prices paid surprisingly jumped to levels last seen in August 2022.
The data sent US Treasury yields skyrocketing, while the US Dollar Index (DXY) soars above 105.00 and gains 0.49%. Upbeat data weighs on the Mexican currency, which has been appreciating by the wide interest rate differential between Mexico and the US.
Daily digest market movers: Mexican Peso treads water after strong US manufacturing activity figures
- Last Monday, Banxico Governor Victoria Rodriguez Ceja remained dovish despite acknowledging that the battle against inflation hasn’t been won. She added, “When macroeconomic conditions and the inflationary outlook allow us to make additional adjustments to the reference rate to the one we already have, I consider that they would be gradual.”
- A weaker Mexican Manufacturing PMI, along with the Indicator of General Economic Activity contracting in January, could open the door for further easing by Banxico. The latest meeting minutes will be released on April 4.
- The ISM Manufacturing PMI expanded by 50.3, above forecasts of 48.4, smashing February’s 47.8 reading. The Prices Paid Index expanded to 55.8, its highest level since August 2022, when it hit 52.5.
- S&P Global revealed the latest revision of March’s Manufacturing PMI for the United States, which came in at 51.9, up from the previous reading of 52.2.
- Last week, the Core Personal Consumption Expenditure (PCE) price index, the Fed’s favored gauge for inflation, cooled as expected.
- Chair Powell said at San Francisco Fed: “The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”
Technical analysis: Mexican Peso at risk of shifting neutral as USD/MXN hovers around 16.65
The USD/MXN daily chart depicts that buyers lifted the exchange rate to a new four-day high of 16.67. Yet they still need to achieve a daily close above last year’s low of 16.62 before moving to test the 50-day Simple Moving Average (SMA) at 16.95. Further upside is seen at the 100-day SMA at 17.05, ahead of the 200-day SMA at 17.19.
On the flip side, the USD/MXN might extend its losses if it remains below 16.62. A breach of the current year-to-date (YTD) low of 16.51 can pave the way toward the October 2015 swing low of 16.32.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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