- Mexican Peso depreciates even though inflation data in Mexico was mixed.
- Mexico’s inflation exceeded forecasts, which could deter Banxico from easing policy throughout the first quarter 2024.
- USD/MXN soared toward the 16.90 area due to the overall strength of the US Dollar.
The Mexican Peso (MXN) is losing steam against the US Dollar (USD) in early trading on Tuesday as the Greenback rises. December’s inflation was higher than expected in Mexico, which might deter the Bank of Mexico (Banxico) from easing policy, as two of its policy members expressed in December. At the time of writing, USD/MXN is trading at 16.94, gaining 0.68%.
Mexico’s National Statistics Agency (INEGI) announced that consumer prices rose above estimates in headline inflation, while core inflation reached its lowest level since October 2021. The data initially underpinned the Mexican currency, with the USD/MXN dropping toward 16.78. Buyers moved in and lifted the exchange rate.
Across the border, Federal Reserve (Fed) officials continued to support the current level of interest rates, based on comments from Atlanta Fed President Raphael Bostic and Fed Governor Michelle Bowman. Data-wise, US small business sentiment improved, while the Balance of Trade printed a narrower deficit in November, revealed the US Department of Commerce.
Daily digest market movers: Mexican Peso at the mercy of strong US Dollar
- Mexico’s Consumer Price Index (CPI) rose by 4.66% YoY in December, exceeding forecasts of 4.55%, and November’s was 4.32%. Core figures came at 5.09%, less than the consensus and the previous month’s 5.15% and 5.30%, respectively.
- Federal Reserve officials expressed that interest rates should remain at current levels. Bostic emphasized that policy needs to stay tight, while Bowman added that policy is sufficiently restrictive.
- The US Trade Balance deficit narrowed more than expected in November, from the $-65 billion estimate to $-63.2 billion and less than October’s $-64.5 billion.
- The US 10-year Treasury bond yield advances.
- Consumer Confidence in Mexico deteriorated in December as households remained concerned about the future economic outlook.
- The US economy continues to paint a mixed economic outlook as the latest US jobs data was mixed while business activity in manufacturing contracted and the service sector is deteriorating. Although a soft-landing scenario looms, the chance of a mild recession has increased, so caution is warranted.
- Although the latest Banxico meeting minutes indicate the central bank might consider easing policy, December’s inflation report might prevent the central bank from relaxing policy.
- Last Tuesday, Mexico’s S&P Global Manufacturing PMI for December peaked at 52.0, below November’s 52.5, suggesting the economy is slowing down amid Banxico’s tightening cycle.
- On Wednesday, Business Confidence in Mexico improved to 54.6 from 54.0 in November, although it failed to underpin the Mexican Peso, which remained weak during the session.
Technical analysis: Mexican Peso weakens as the USD/MXN rises and threatens to reach 17.00
Although the USD/MXN resumed its downtrend, the current leg-up toward the 16.90 area could pave the way for an upward correction past the 17.00 figure. A breach of the latter could exacerbate a test of the 17.20 figure, followed by the 50-day Simple Moving Average (SMA) at 17.26.
If sellers prevent the exotic pair from piercing the 17.00 figure, a test of last year’s low is on the cards. But sellers must conquer the 16.80 area, followed by the August 28 swing low of 16.69 ahead of the 2023 low of 16.62.
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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