Mexican Peso shrugs off strong US Dollar and advances modestly

Mexican Peso begins the week on the front foot, despite Fed Chair Jerome Powell hawkish remarks.
Mexico’s economic docket will feature inflation data and Banxico's upcoming rate decision.
US's strong Services PMI and Nonfarm Payrolls hint at the Fed's achievable soft-landing.
Expectations lean towards Banxico holding rates at 11.25%, with eyes on Fed speakers for more insights.

The Mexican Peso (MXN) stages a comeback against the US Dollar (USD), although Federal Reserve Chairman Jerome Powell delivered some hawkish remarks in an interview during the weekend, sponsoring a jump in US Treasury bond yields. Nevertheless, the emerging market currency advances, with the USD/MXN trading at 17.08 down 0.06%.

Mexico´s economic docket is empty due to Mexico’s Constitution Day observance. This week, inflation data will be released on Wednesday, followed by the Bank of Mexico (Banxico) monetary policy decision, on Thursday. Rates are expected to remain unchanged at 11.25%.

In the meantime, the US economy continues to shine as the release of Services PMI by S&P Global and the Institute for Supply Management (ISM) showed that business activity is improving. That, along with last Friday's US Nonfarm Payrolls data, increases the odds of the Fed achieving a soft landing.

Meanwhile, some Federal Reserve speakers had begun to cross the wires following the Fed’s decision last Wednesday.

Daily digest market movers: Mexican Peso on the defensive ahead of Banxico’s decision

Inflation in Mexico would be featured on Thursday before Banxico´s decision. The Consumer Price Index (CPI) in December was 4.66% YoY, and core CPI stood at 5.09% year-over-year.
US S&P Global Services PMI came at 53.4, exceeding estimates and the previous reading, while Composite was 52, up from 50.9.
The ISM Non-Manufacturing PMI, also known as services, edged up from 50.5 to 53.4, exceeding estimates.
S&P Global confirmed Mexico´s BBB foreign currency rating and BBB+ local currency long-term debt rating.
S&P Global affirmed that stable macroeconomic conditions, with a real growth in Gross Domestic Product above 3% in 2023 that is supported by solid domestic demand and moderating inflation, prepare the way for the general elections in June.
Minnesota Fed President Neil Kashkari commented that a strong economy means the Fed is in no hurry to make interest rate cuts. Kashkari acknowledged that inflation is making “rapid progress” towards the Fed’s 2% target and added that policy could not be sufficiently restrictive.
Chicago’s Fed President Austan Goolsbee noted that inflation could remain falling amid a strong US economy,

Technical Analysis: Mexican Peso weakens further as USD/MXN buyers target 17.20

The USD/MXN is neutral-biased and jumped off the 50-day Simple Moving Average (SMA) at 17.13, though it has fallen short of reclaiming the 200-day SMA at 17.32. A daily close above the 17.20 strong resistance buyers could challenge the 200-day SMA, followed by the 100-day SMA at 17.40. Further upside lies at the 17.50 figure.

On the other hand, if sellers drag prices below the 50-day SMA at 17.13, look for a challenge of the February 2 daily low at 17.03, before slumping to 17.00.

USD/MXN Price Action – Daily Chart

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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