- Mexican Peso prolongs its losses, with sellers eyeing 17.70.
- Mexico’s remittances post an annual advance of more than 8%.
- Banxico’s USD/MXN FIX for October 2 at around 17.59.
The Mexican Peso (MXN) fall continued late in the North American session, with the USD/MXN pair approaching the 17.70 area for the second time in the last four trading sessions due to no fundamental reasons. Risk aversion and a strong US Dollar continued to drive price action as the pair exchanges hands at around 17.69, gaining more than 1.50%.
Higher US Treasury bond yields underpin the Greenback (USD), a headwind for the Mexican currency. As the US 10-year benchmark note rate sits near 4.70%, the US Dollar Index (DXY) Is steadily advancing toward 107.00, at around 106.91, gains 0.70%.
The Bank of Mexico (Banxico) recently revealed that remittances sent to Mexico in August 2023 were $5,563 million in US Dollars, implying an annual advance of 8.6%. Banxico said, “The surplus of Mexico’s remittance account with the rest of the world was 5,459 million dollars, greater than the 5,035 million dollars that was presented in August 2022.” At the same time, the Mexican central bank determined the FIX exchange rate at 17.5920.
Daily Digest Market Movers: Mexican Peso rallied to a daily high of 17.71
- Banxico’s latest poll amongst economists reported that interest rates are expected to remain at 11.25%, while inflation would dip to 4.66%.
- The same poll shows the exchange rate is set to finish at around 17.64, down from 17.75.
- Mexico’s S&P Global Manufacturing PMI for September came at 49.8, sliding to contractionary territory and below August’s 51.2, as the economy loses steam.
- Business confidence in Mexico improved from 53.7 to 53.8.
- Mexico’s economy could slow down due to complex external shocks, according to the financial system stability committee.
- The Bank of Mexico (Banxico) held rates at 11.25% and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
- Banxico’s Government Board highlighted Mexico’s economic resilience and the strong labor market as the main drivers to keep inflation at the current interest rate level.
- BBVA updated Mexico’s economic growth forecast, with the Gross Domestic Product rising by 3.2% from 2.4% in 2023 to 2.6% from 1.8% in 2024.
- Mexico’s Unemployment Rate edged lower from 3.1% in July to 3.0% in August, according to the National Statistics Agency (INEGI).
- September’s first-half inflation in Mexico was 4.44%, down from 4.64% in August, according to INEGI.
- Being an emerging market currency, the Mexican Peso weakens amid risk aversion.
- Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
- In July, Moody’s lowered Mexico’s rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
Technical Analysis: Mexican Peso at the brisk of depreciating to 18.00
The Mexican Peso (MXN) is erasing last Friday’s gains, with the USD/MXN beginning to form a bullish-engulfing candle pattern after the pair bottomed at around 17.41. The emerging market currency could continue its depreciation if the exotic pair manages to break resistance at September’s 27 high at 17.81, immediately followed by the 200-day Simple Moving Average (SMA) at 17.82. Once those two areas are cleared, the USD/MXN next stop could be 18.00.
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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