- Mexican Peso climbed on Friday, but the USD/MXN shows weekly losses of more than 1%..
- Banxico's decision to maintain interest rates at 11.25% and a shift in language hinting at less hawkish future policy impacts the Peso.
- Federal Reserve Chair Jerome Powell commented that the Fed would not hesitate to adjust monetary policy tighter.
Mexican Peso (MXN) is set to finish Friday’s session with gains versus the US Dollar (USD) of 0.81%, though it would end the week with losses of more than 1%, as the USD/MXN recovered some ground, with buyers reclaiming the 17.50 figure. At the time of writing, the pair trades at 17.64, down in the day 0.81%.
The week was characterized by mixed economic data in Mexico, though the deflationary process continued, as inflation hit 4.26%, revealed INEGI on Thursday. Later that day, Banxico held rates at 11.25%, justifying that inflation remains high and stating that for “some time,” rates would need to stay current. The Mexican central bank language was less hawkish as they said, “In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, the reference rate must be maintained at its current level for some time.” This rephrasing removed the past statement that it would maintain rates “for an extended period.”
Meanwhile, Fed Chair Jerome Powell was hawkish, saying that officials “are not confident” that monetary policy is sufficiently restrictive while adding, "If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Daily digest movers: Mexican Peso recovers some ground as traders shrug off weak Mexico’s Industrial Production
- Industrial Production in Mexico cooled down, revealed the National Statistics Agency (INEGI). The print was 3.9% YoY in September, below the 4.4% forecast and trailing August’s 5.2%.
- The University of Michigan's Consumer Sentiment Index in October decelerated to 60.4, missing forecasts and the previous month’s readings of 63.7 and 63.8, respectively.
- Americans expect inflation to remain higher, as they see prices a year from now up 4.4%, higher than August’s 4.2% and the five-year average at 3.2%, up from 3%.
- On Thursday, Mexico’s inflation expanded by 4.26% YoY in October, below forecasts of 4.28%, and the previous reading was 4.45%. On a monthly basis, inflation rose 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
- Initial Jobless Claims in the United States for the week ending November 4 rose by 217K, below estimates of 218K and last week’s 220K.
- Fed officials continued to strike mixed signals, as the Philadelphia Fed’s Patrick Harker emphasized that rates must remain higher for longer. On the contrary, Chicago’s Fed Goolsbee turned dovish as he saw risks of overshooting rates.
- Money market futures have priced in a 25 bps rate cut by the Federal Reserve in July 2024.
- Mexico´s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
- Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).
Technical Analysis: Mexican Peso is set to plunge further as Golden Cross emerges, USD/MXN extends its gains
The USD/MXN shifted from neutrally biased to neutrally upward biased as buyers emerged from below the 200-day Simple Moving Average (SMA) at 17.67 and lifted the pair more than 1.60% since Thursday's opening. It should be said that the 50-day SMA is above the 200-day SMA, suggesting that a Golden Cross formed a bullish signal. Hence, the pair might gain some steam as buyers have the upper hand, but they must first breach the 20-day SMA at 17.93, putting the psychological 18.00 threshold into play.
Conversely, key support levels lie at the 50 and 200-day SMAs, each at 17.00 and 17.67, respectively, followed by Monday's low of 17.40 and the 100-day Simple Moving Average (SMA) at 17.33. A breach of the latter will expose the 17.00 figure before the pair aims to test the year-to-date (YTD) low of 16.62.
Central banks FAQs
What does a central bank do?
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%.
What does a central bank do when inflation undershoots or overshoots its projected target?
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.
Who decides on monetary policy and interest rates?
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%.
Is there a president or head of a central bank?
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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