- Mexican Peso plummets as the USD/MXN tests key resistance level, which could shift the pair bullish.
- Risk appetite is mixed, though elevated US Treasury yields underpin the US Dollar.
- Upcoming economic data from Mexico, including the Economic Activity report and mid-month inflation figures, are closely watched by traders
The Mexican Peso (MXN) plunges sharply against the US Dollar (USD) on Tuesday on risk aversion in the FX space. This benefits safe-haven currencies to the detriment of the emerging market currency. That, along with a jump in Treasury yields in the United States, underpins the USD/MXN, which trades at 17.34, up by almost 1%.
Wall Street is trading mixed, weighed down by the sudden rise in US Treasury bond yields. The increase in yields is led by the belly and the long end of the yield curve, rising between four and seven basis points. The US Dollar Index (DXY), which tracks the buck’s performance against a basket of six other currencies, gains 0.37%, up at 103.74. The Greenback has been bolstered by traders pushing back their expectations of Federal Reserve (Fed) rate cutting from March until May, according to the CME FedWatch Tool data.
Across the border, Mexico’s economic docket will feature the release of the Economic Activity report, along with January’s mid-month inflation data.
Daily Digest Market Movers: Mexican Peso weakens the most since January 16, ahead of crucial data
- The former Bank of Mexico (Banxico) Governor and current General Manager of the Bank of International Settlements, Agustin Carstens, said that the central bank must not lower interest rates prematurely, adding that, “Recent developments allow us (central bankers) to look at the future with cautious optimism.” Carstens said that even though there’s progress on the disinflation process, “inflation is still above central bank targets in most countries and needs to fall further.”
- Agustin Carstens’s posture and that of former Banxico Deputy Governor Everardo Elizondo suggest that policy should remain restrictive, which could deter the Mexican central bank from cutting rates, which currently sit at 11.25%, as traders await mid-January’s inflation report.
- Mid-month inflation in Mexico is expected to edge toward 4.78%, while the core is expected to dip further below the 5% threshold.
- The recent economic figures from Mexico indicate a deceleration in the economy, evidenced by Retail Sales falling short of expectations and being lower than those of October. Concurrently, projections for economic growth stand at 2.6%, which is under the anticipated 3%.
- On the US front, last week’s economic data paints a soft-landing outlook. Even though housing data was mixed, American household sentiment improvement, and lower inflation expectations underpinned the USD/MXN.
- Atlanta GDPNow model suggests last year’s Q4 likely expanded by 2.4%, spurred by strong retail sales, firm industrial production, a tight labor market and consumer sentiment improvement.
- Traders trimmed their bets for a dovish Federal Reserve in 2024. They stand at 139 basis points (bps) of cuts from 175 bps last week.
- Mexico witnessed a jump in headline inflation, but core data suggests the Bank of Mexico (Banxico) has done a good job, curbing elevated prices after hiking rates toward 11.25%.
- Despite indications from the December meeting minutes of Banxico (the Central Bank of Mexico) that it may consider easing its monetary policy, the inflation report for January poses a potential obstacle to any such policy relaxation.
- Standard Chartered analysts estimate the Bank of Mexico (Banxico) will lower rates to 9.25% in 2024.
- On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.
Technical Analysis: Mexican Peso falls to four-day low as USD/MXN meanders around 200-day SMA
The USD/MXN daily chart depicts buyers gathering momentum as they dragged the exchange rate to the brisk of breaching the 200-day Simple Moving Average (SMA) at 17.36. Once cleared, this could open the door to test the 100-day SMA at 17.42. Further upside is seen at the psychological 17.50 barrier, ahead of aiming toward the May 23 high at 17.99.
Failure to decisively break the 200-day SMA could open the door for a leg up, with first support at the 50-day SMA at 17.14, followed by the 17.05 swing low reached on January 22, ahead of the 17.00 figure.
USD/MXN Price Action – Daily Chart
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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