Mexican Peso surges as traders price in Fed cuts after CPI decline
Most recent article: Mexican Peso defies odds, rises despite Trump's tariffs tensions
- Mexican Peso drives USD/MXN towards the 20.00 figure.
- Tariff uncertainties persist but yield advantage keeps Peso attractive
- US CPI data softer than expected, raising bets on Fed rate cuts and boosting MXN appeal.
- Mexico’s Finance Minister acknowledges economic slowdown amid trade tensions; Industrial data eyed.
The Mexican Peso (MXN) rallies against the US Dollar (USD) on Wednesday as the latest inflation report in the United States (US) could force the Federal Reserve (Fed) to lower borrowing costs, hence widening the interest rate differential between Mexico and the US. At the time of writing, the USD/MXN pair trades at 20.16, down 0.45%.
Mexico’s economic docket remains absent, with traders eyeing the release of Industrial Production figures. Nevertheless, data has taken a backseat as US trade policies drive the financial markets.
Today, the US began applying 25% tariffs to aluminum and steel imports worldwide, without exemptions, including Mexico. Mexican President Claudia Sheinbaum said that she would wait for a resolution in the upcoming weeks, adding “We will wait until April 2 and from then we will see whether our definition of reciprocal tariffs will be applied too.”
Mexican Finance Minister Edgar Amador Zamora said the national economy is expanding but shows signs of slowing down linked to trade tensions with the US.
The US Bureau of Labor Statistics (BLS) revealed that consumer inflation in the US came beneath estimates in headline and underlying figures. Although this is a relief for the Federal Reserve (Fed), concerns that tariffs could be inflation-prone would likely keep the Fed in holding mode as they assess their impact on monetary policy.
Besides this, Fed officials will watch the release of the Producer Price Index (PPI) on Thursday, as some of its data is used to calculate the Core Personal Consumption Expenditures (PCE) Price Index.
Daily digest market movers: Mexican Peso rises boosted by weak US Dollar
- Data in Mexico shows the economy is slowing down, with private economists estimating growth at 0.81%, according to a Banco de Mexico (Banxico) February poll. This and a dismal Consumer Confidence report on Monday suggest that Banxico could lower interest rates at the upcoming March 27 meeting.
- According to Reuters, Mexico's president said on Wednesday that the country's government will not tap its open credit line with the International Monetary Fund (IMF), adding that current economic challenges do not yet require financing from the lender.
- The US Consumer Price Index (CPI) rose 0.2% MoM in February, below the expected 0.3%. On a year-over-year (YoY) basis, inflation eased from 3.0% to 2.8%.
- Core CPI, which excludes volatile food and energy prices, increased 0.2% MoM, slowing from January’s 0.4% and falling short of forecasts. Over the past twelve months, Core CPI declined from 3.3% to 3.1%, signaling further disinflationary progress.
- Money market futures traders had been priced in 74 basis points of easing by the Federal Reserve (Fed) toward the end of the year.
- A Reuters poll showed that 70 out of 74 economists say the risk of recession has risen in the US, Canada and Mexico.
- In the boiler room, trade disputes between the US and Mexico remain front and center. If the countries reach an agreement, it could pave the way for a recovery of the Mexican currency. Otherwise, further USD/MXN upside is seen as US tariffs could trigger a recession in Mexico.
USD/MXN technical outlook: Mexican Peso surges as USD/MXN tumbles below 20.20
USD/MXN finally broke below the 20.20 figure, which opens the door to test the 20.00 figure, as sellers push the spot price below the 100-day Simple Moving Average (SMA) at 20.22. If the pair drops below 20.00, sellers could challenge the 200-day SMA at 19.62.
Conversely, if USD/MXN climbs past the 100-day SMA, buyers could be tempted to challenge the 50-day SMA at 20.47. Once surpassed, the 20.50 mark is up next.
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
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
