Mexican Peso weakens before Banxico monetary policy decision
- Mexican Peso hovers near the 50-day SMA at 20.11, with the USD/MXN showing minimal movement after US PMIs data.
- Banxico is widely anticipated to cut rates following encouraging November inflation figures, with most economists predicting a 25 bps reduction.
- Anticipation builds around upcoming rate decisions from the Fed and Banxico.
The Mexican Peso begins the week on the back foot, yet it remains near the 50-day Simple Moving Average (SMA) at 20.11 as US business activity expanded in the services sector while manufacturing remains depressed. At the time of writing, the USD/MXN trades with minimal gains of over 0.06%, virtually unchanged.
US S&P Global revealed December’s Flash PMIs, which came in mixed. The Services and Composite PMIs jumped above the prior month’s reading, indicating economic strength. However, manufacturing activity contracted after hitting its highest level in the last six months.
The USD/MXN ignored the data yet held to earlier gains. The exotic pair could witness some volatility in the next few days as the Federal Reserve (Fed) and the Banco de Mexico (Banxico) will announce their latest monetary policy decisions.
The CME FedWatch Tool data show that the Fed is expected to cut rates by 25 basis points on December 18 with odds at 98%. Meanwhile, a Reuters poll showed that 20 of 22 economists expect Banxico to cut rates by 25 bps to 10.00%, while two estimate the institution will lower rates by 50 bps.
Mexico’s data last week gave the green light to its central bank to ease policy. November inflation data confirmed that the disinflation process is accelerating.
This week, Mexico will feature Retail Sales data, Aggregate Demand, Private Spending, and Banxico’s interest rate decision. In the US, Retail Sales, Building Permits, the Federal Open Market Committee (FOMC) decision, and the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, could dictate the monetary policy path for the US central bank.
Daily digest market movers: Mexican Peso trades sideways following Banxico survey
- Banxico’s December private sector survey showed that most economies expect inflation to end at 4.37% in 2024 and underlying prices at 3.60%, down from November’s 3.69%. The economy is expected to grow 1.60%, up from 1.53%, and the USD/MXN exchange rate is foreseen at 20.25.
- For 2025, the Mexican Consumer Price Index (CPI) is projected to drop to 3.80%, and the core CPI to rise to 3.72%. Gross Domestic Product (GDP) is expected at 1.12%, down from 1.20% estimated in November, and the USD/MXN spot price would end at 20.53.
- The Banco de Mexico Interbank Lending Rate, known as TIIE, is expected to drop from 10.00% in 2024 to 8.38% by the end of next year.
- The Peso has been pressured by harsh rhetoric by US President-elect Donald Trump, who threatened to impose 25% tariffs on Mexican imports if the government doesn’t help fight illegal immigration and fentanyl trafficking.
- Analysts at JPMorgan hinted that Banxico could lower rates by 50 basis points as inflation data shows that prices are edging lower faster than expected.
USD/MXN technical outlook: Mexican Peso drops as USD/MXN hovers near 20.10
The USD/MXN remains upwardly biased, though it seems likely to edge lower in the near term. Momentum shifted bearishly with the Relative Strength Index (RSI) falling below its neutral level. If sellers can hurdle some support levels, the exotic pair will see further downside.
The 50-day Simple Moving Average (SMA) at 20.08 continued to cap the USD/MXN fall. If surpassed, the next stop would be the 20.00 figure, with further drops seen to the 100-day SMA at 19.71. A breach of the latter will expose 19.50.
Conversely, if USD/MXN climbs past 20.25, immediate resistance would be 20.50. Once hurdled, it will expose the December 2 daily high of 20.59, followed by the year-to-date peak of 20.82, followed by the 21.00 mark.
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.
Author
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
