- The Mexican peso holds onto recent losses against a stronger US Dollar.
- Mexican economic figures disappointed this week, boosting speculation of a Banxico rate cut on Thursday.
- The USD/MXN pair keeps trading within the weekly range, with upside attempts limited below 20.30.
The Mexican Peso (MXN) is trading lower for the second day in a row and is on track for a moderate decline this week, as the US Dollar remains bid, underpinned by higher US Treasury yields.
US Jobless Claims figures released on Thursday cemented hopes that the Federal Reserve (Fed) will cut rates next week, but the higher Producer Price Index (PPI) figures made traders increasingly convinced that next year’s easing will be very gradual.
Mexican data, on the contrary, disappointed this week. The Industrial Output in October deteriorated beyond expectations and consumer inflation eased more than forecasted in November. These figures have endorsed the view that the Bank of Mexico will cut rates for the fourth consecutive time next week.
Daily digest market movers: MXN suffers on downbeat Mexican data and USD strength
- The US Dollar Index keeps marching higher, on track for a 1% increase this week, boosted by higher US yields. The benchmark 10-year yield has gained 20 basis points this week to reach levels above 4.30% for the first time in three weeks.
- US Consumer and Producer inflation accelerated this week, showing that price pressures are picking up. This scenario is likely to limit the scope for Fed easing next year.
- The CME Fed Watch tool shows that the market is nearly fully pricing a 25 bps rate cut after the December 17-18 meeting. However, for next year, the market is leaning toward two more cuts, with the option of three cuts losing support.
- In Mexico, Thursday’s data revealed that the Industrial Production contracted by 1.2% in October, beyond market expectations of a 0.2% decline. Year-on-year, the Industrial Output declined 2.2% instead of the 0.6% expected. Data released in September showed a 0.6% monthly increase and a 0.3% decline in the previous 12 months.
- Earlier this week, Mexican consumer prices eased at a 4.55% yearly rate from 4.76% in October, beyond market expectations of a 4.59% reading. Likewise, the monthly CPI eased 0.44%, below the 0.48% expected, from 0.55% in the previous month.
Mexican Peso technical outlook: USD/MXN likely to find resistance at 20.30
The USD/MXN pair has bounced up from an important support level at the psychological 20.00 area, but it remains trading within the weekly range below the December 5 and 10 high at 20.30.
The pair’s short-term bias remains bearish as long as the mentioned 20.30 resistance remains in place. The double top at 20.80 suggests the possibility of a deeper correction.
A confirmation above 20.30 would shift the focus towards the December 2 high at 20.60 before November’s peak at around 20.80. On the downside, the 20.00 level is holding bears. Below here, the October 24 and November 7 low at 19.75 is likely to be targeted.
USD/MXN 4-Hour Chart
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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