Most recent article: Mexican Peso recovers slightly amid Banxico’s hawkish stance on interest rates

  • Mexican Peso depreciates more than 1.8%, driven by Middle East tensions and robust US economic data.
  • The IMF cuts Mexico's growth forecast, expecting tighter fiscal policies ahead.
  • Mexico aims to reduce its fiscal deficit by half through major spending cuts, potentially dampening growth.

The Mexican Peso plunged and dived close to 2% against the US Dollar on Tuesday, courtesy of risk aversion and hawkish comments by Federal Reserve Chair Jerome Powell. The reasons are the Middle East conflict escalation, along with solid economic data from the United States (US) and overall US Dollar strength. The USD/MXN trades at 17.04, bouncing off daily lows of 16.68.

Recently, the Federal Reserve Chair Jerome Powell commented that the US economy has performed quite strongly while acknowledging that recent data shows a lack of further progress on inflation. That triggered a leg-up in the USD/MXN, while futures traders see 35 basis points of rate cuts by the Fed in 2024.

Mexico’s economic docket remains absent, with the next significant data release being March Retail Sales, scheduled for April 19, 2024. In the meantime, the International Monetary Fund (IMF) downwardly revised economic growth in Mexico from 2.7% to 2.4% in 2024 and from 1.5% to 1.4% in 2025.

The IMF reduced its 2025 forecast, arguing that the fiscal expansion that will drive progress this year will be reversed in the next year because the new administration will have to tighten its belt, reversing existing spending policy.

In that regard, Mexico’s Ministry of Finance expects the fiscal deficit to decrease from 5% to 2.5% of the Gross Domestic Product (GDP) next year, which would imply a cut in spending of 833.6 billion Pesos, according to the Pre-General Policy Criteria Economic 2025.

Across the border, US economic data was mixed, with housing figures missing estimates, while Industrial Production stood pat. Traders are bracing for Federal Reserve (Fed) Chair Jerome Powell's speech at 17:15 GMT.

Daily digest market movers: Mexican Peso loses traction on risk aversion

  • March’s Building Permits in the US decreased by 4.3%, dipping to 1.458 million, less than the 1.514 million estimates and February’s 1.523 million. Consequently, Housing Starts plunged 14.7%, from 1.549 million to 1.321 million, below forecasts of 1.48 million.
  • The Fed revealed that March’s Industrial Production was aligned with estimates and the previous reading of 0.4% MoM.
  • Despite posting mixed data, traders continue to digest the strong March US Retail Sales report revealed on Monday. This report was highlighted by the behavior displayed by the control group—used to calculate the GDP—crushing estimates and the previous month's reading.
  • Retail Sales in the control group jumped from 0.3% in February to 1.1% MoM in March, surpassing forecasts of a 0.4% expansion.
  • Geopolitical tensions in the Middle East would likely weigh on the Mexican currency.  USD/MXN traders must be aware that any escalation could prompt traders to ditch the Mexican Peso and buy US Dollars.
  • US Treasury yields surged more than 10 basis points (bps) in the belly and long end of the yield curve. That underpins the Greenback, which is up a modest 0.09% at 106.17 on the DXY.
  • Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 4.97%.

Technical analysis: Mexican Peso depreciates sharply, USD/MXN pierces 17.00

The USD/MXN daily chart shows that the pair has shifted to a neutral/upward bias as the Mexican currency tumbles and depreciates past the 17.00 figure. On its way north, the pair has broken key resistance levels. These include the 50 and 100-day moving averages (DMAs), each at 16.81 and 17.03, which could pave the way for further upside.

The next resistance would be the 200-DMA at 17.16. Once cleared, that could pave the way to challenging the January 17 high at 17.38 before testing the 17.50 psychological level. On the other hand, if USD/MXN slides below 17.00, look for a pullback toward last year’s low of 16.62, followed by the April 12 low of 16.40.

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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