Mexican Peso dives as Banxico signals possible policy easing

Most recent article: Mexican Peso gains as US inflation and Jobless Claims weaken US Dollar

• Mexican Peso declines slightly against the Dollar as Banxico revises Mexico’s GDP and sparks speculation on an imminent policy pivot.
• Banxico governors express divergent views on rate adjustments, indicating a cautious approach to easing.
• Market anticipates 75 basis points of rate cuts from Banxico in the first half of 2024, eyeing a shift to 10.50%.
• US economic data and Federal Reserve officials' speeches set the backdrop for MXN's movements against the USD.

Mexican Peso edges lower against the US Dollar on Wednesday, posting modest losses after the Bank of Mexico (Banxico) revealed its Q4 2023 report, which updated the Central Bank’s view of monetary policy and projections. Data from the United States showed the economy expanded at a slower pace while investors brace for a crucial US inflation report. The USD/MXN exchanges hands at 17.10, up 0.27%.

Mexico’s economic docket is light, except for Banxico’s release. Governor Victoria Rodriguez Ceja said the Gross Domestic Product (GDP) was downward revised from 3% in the previous report to 2.8%. For 2025, she expects GDP to be at 1.5%, unchanged from the previous projections. Banxico estimates they will achieve the 3% goal in the second quarter of 2025.

Banxico’s quarterly report release was characterized by different stances on monetary policy, amongst the five Governors

Governor Victoria Rodriguez Ceja said that the real ex-ante rate increased to 7.47% in February 2024, above the bank’s neutral interest rate, indicating that the policy is over-tightening. She added that “we have elements to start the discussion for a reduction in the reference rate,” noting that general and underlying inflation “will continue to decline.” Hence, since March, all the Banxico meetings would be “live.”

Although most inflationary readings are skewed to the upside, Banxico would face some challenges in the disinflationary process. Meanwhile, Banxico’s Deputy Governor Jonathan Heath supports the idea of a quarter of a percentage cut to adjust the real rates. After that, he favors the idea of keeping rates higher for longer.

Deputy Governor Omar Mejia added, “Adjustments to posture are going to have to be gradual. Continuous changes will depend on the panorama of the evolution of inflation as a whole and consider that there are conditions to evaluate an adjustment to the reference rate. Even with an adjustment, monetary policy will remain restrictive.”

Policymaker Galia Borja recognized the disinflation process that began in 2023 has continued. She said, "It is important to recognize this process that is taking place and the reversal that is taking place in inflation expectations. We must be very cautious and prudent, and wait decision by decision, according to the inflation that is revealed to us".

Last but not least, one of the remaining “hawks” of Banxico, Irene Espinosa, said that in their decision, they would consider exogenous and endogenous variables. "What is the evolution of general inflation, but also what is explaining the evolution of inflation. We cannot rule out a scenario in which core inflation could remain at constant levels, and in which non-core inflation could rebound. With "Based on the entire set of information we would have to evaluate the decision of the month of March"

In the meantime, expectations for the Mexican central bank to ease monetary policy in March remain high, with market participants estimating 75 basis points of easing over the next six months. This means the Mexican interest rates, currently standing at 11.25%, would be lowered to 10.50% in the first half of 2024.

Across the border, the US schedule featured the release of Gross Domestic Product (GDP) data for Q4 2023 and Retail and Wholesale Inventories for January. Meanwhile, Federal Reserve (Fed) policymakers will cross the wires, led by regional Fed Presidents Raphael Bostic, Susan Collins and John C. Williams.

Daily digest market movers: Mexican Peso drifts lower ahead of Banxico’s Q4 2023 report

• Mexico’s economy is expected to slow down due to higher interest rates set by Banxico at 11.25%. That’s the main reason that sparked a shift in three of the five governors of the Mexican Central Bank, who are eyeing the first rate cut at the March 21 meeting.
• In that event, the Mexican Peso could depreciate, opening the door for further upside on the USD/MXN pair.
• The latest inflation report in Mexico showed that headline and underlying inflation continued to dip toward Banxico’s goal of 3%, plus or minus 1%, while economic growth exceeded estimates but finished below Q3’s 3.3%.
• Mexico’s economic data released during the week from February 26 to March 1.
  • The Balance of Trade for January revealed the country posted a trade deficit of $302 million.
  • Mexico’s Consumer Price Index (CPI) in the first half of February was 4.45%, down from 4.9% YoY.
  • Mexico’s Core CPI slowed from 4.78% to 4.63% on an annual basis.
  • Mexico’s GDP for Q4 2023 exceeded estimates of 2.4% YoY and hit 2.5%, less than Q3 2023 print of 3.3%.
• Economic trade issues between Mexico and the US could depreciate the Mexican currency if the Mexican government fails to resolve its steel and aluminum dispute with the United States. US Trade Representative Katherine Tai warned the US could reimpose tariffs on the commodities.
• Across the border, Gross Domestic Product (GDP) for the last quarter of 2023 missed estimates by a tick, though it came at 3.2% YoY, down from Q3 4.9%.
• US Retail Sales Inventories rose 0.3% MoM in January, below 0.4% in the previous month's data, while Wholesale Inventories declined -0.1% MoM, missing estimates of 0.1%
• In January, US Durable Goods Orders significantly declined to -6.1% MoM, exceeding the anticipated contraction of -4.5% and marking a steeper fall compared to December's -0.3% decrease.
• In December, the S&P/Case-Shiller Home Price Index indicated a monthly decline of -0.3%, a slight acceleration in the contraction pace from November's -0.2%. On an annual basis, home prices rose by 6.1%, surpassing both expectations and the growth rate from the previous month.
• Market players had trimmed the odds for the first 25 basis point (bps) rate cut in June, with odds lying at 49%, down from 53% a day ago, while 39% of investors expected the Fed to keep rates unchanged at the current level of 5.25%-5.50%.

Technical analysis: Mexican Peso trips down as USD/MXN meanders above 50-day SMA

The USD/MXN is trading above the 50-day Simple Moving Average (SMA), which stands at 17.06, after the pair posted three days of losses. Relative Strength Index (RSI) studies are about to turn bullish, which could exacerbate a leg up toward the 17.10 area. Once cleared, traders could target 17.20. Further upside would be expected if buyers reclaim the 200-day SMA at 17.25 and the 100-day SMA at 17.33.

On the flip side, if USD/MXN drops below the 50-day SMA, look for a challenge of the 17.00 mark. A breach of the latter, and the pair would tumble to test yearly lows of 16.78, followed by last year’s low of 16.62.

USD/MXN Price Action – Daily Chart