Mexican Peso wraps up strongly upward amid falling US yields and USD downturn

Most recent article: Mexican Peso slips back late Wednesday despite upbeat MXN Retail Sales

Mexican Peso advances against the US Dollar, USD/MXN threatens 17.00 support area.
Mexico’s economic docket ahead includes Retail Sales on Wednesday, followed by Thursday’s inflation data.
US housing data was solid but failed to move the needle in favor of the US Dollar, which remains on the defensive.

The Mexican Peso (MXN) rally against the US Dollar (USD) continued during the North American session on Tuesday, as the Greenback (USD) remains pressured despite US Federal Reserve (Fed) officials’ efforts to push back against aggressive bets suggesting the central bank would lower rates by more than 100 basis points next year. That is weighing on the US Dollar, as seen by the USD/MXN pair trading at 17.07, down 0.49% on the day, after reaching a new three-month low at around 17.02.

US central bank policymakers continued to cross the wires. Atlanta’s Fed President said he projects two rate cuts but added that policy would remain restrictive. Earlier, Richmond Fed President Thomas Barkin stated that inflation remains the principal focus for the Fed and welcomed the progress on inflation. However, he stated that due to the disinflation progress, they could re-focus on its dual mandate.

In the meantime, Mexico’s economic calendar remained scarce on Tuesday, but on Wednesday, it will feature Retail Sales for October. By Thursday, December's mid-month headline and underlying inflation data will be announced. Across the border, the solid housing data from the United States (US) did little to nothing to help the Greenback, which, according to the US Dollar Index (DXY), has dropped to a new two-day low of 102.10, a loss of 0.34%.

Daily digest market movers: Mexican Peso extends gains as USD/MXN drops below 17.10

US Housing Starts rose by 14.8% in November, smashing October’s 0.2% expansion, while Building Permits as a whole contracted at a 2.5% rate, trailing October’s 1.8% growth. Although the data was solid, it was ignored by market participants.
Recent comments from the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja suggest the central bank would be cautious in setting monetary policy next year. She said they would remain data-dependent, and if the disinflation process continues, they could lower rates in the first quarter of 2024.
Banxico’s Governor noted that despite reviewing their inflation projections for 2024, the central bank kept its forecast of inflation returning to its 3% target in 2025.
Lastly, Victoria Rodriguez Ceja added the Governing Council considers several factors when determining its policy, including the exchange rate, though they’re not focused on a specific level.
In Banxico’s last meeting, the central bank unanimously voted to hold rates at 11.25% and revised its inflation forecast for some quarters of 2024 and 2025.
Even though US business activity gathered traction in December, as revealed by S&P Global PMIs, the markets would face a reality check on December 21, with the release of the Gross Domestic Product (GDP) for the third quarter expected to remain at 5.2% QoQ, above Q2’s 2.1%.
According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rates (FFR) to 4.60% in 2024, though they remain data-dependent.
As of today, money market futures estimate the Fed will slash rates by 134 basis points toward the end of next year, three basis points lower than December’s 18 and twice the Fed’s forecasts of three 25 bps cuts for 2024, according to the SEP.

Technical analysis: Mexican Peso threatens critical technical area

The USD/MXN is trading sideways though tilted to the downside, as the 100, 200, and 50-day Simple Moving Averages (SMAs) begin to converge toward the 17.41/58 area, almost shifting flat. The downtrend is gathering pace, accelerating toward the bottom of the 17.00-17.60 range. A daily close below 17.00 would exacerbate a leg-down toward the year-to-date (YTD) low of 16.62, ahead of the end of the year.

Otherwise, if bulls regain the 100-day SMA at 17.41, the USD/MXN could edge toward the 200-day SMA at 17.51 in route to the 50-day SMA at 17.56. Once those levels are surpassed, further upside lies at the psychological 18.00 figure.

Aside from this, I will be taking a short break to celebrate the holiday season. I want to wish you a Merry Christmas and a Happy New Year! Stay tuned, as I will be back on January 3, ready to provide you with insightful content to our Mexican Peso traders.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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