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Mosr recent article: Mexican Peso rally pauses on risk-off mood, upbeat US housing data

  • Mexican Peso continues its five-day rally as the USD/MXN drops below the key support at the 100-day SMA.
  • Banxico’s officials comments suggest the central bank would adopt a slightly dovish stance in 2024.
  • The US inflation downward path continues as export and import prices plunge.
  • Industrial Production in the United States suggests the economy could slow down faster than expected.

Mexican Peso (MXN) extended its gains for the fifth consecutive day against the US Dollar (USD) after a raft of economic data from the United States (US) continues to cement a scenario of no more rate hikes by the US Federal Reserve (Fed). The USD/MXN pair hit a daily high at around 17.33, below the 100-day Simple Moving Average (SMA) of 17.34, before resuming its downtrend, which was positive for the Peso.

Mexico's economic docket remains scarce, with traders leaning to the latest comments from Bank of Mexico (Banxico) officials, its Governor Victoria Rodriguez Ceja, and Deputy Governor Jonathan Heath. Both stressed rate cuts could begin in 2024 but emphasized that monetary policy would continue to be restrictive despite that.

On the US front, inflation extended its downtrend after prices paid by producers followed the path of lower consumer prices, though the latter remained above the Fed’s 2% target. Thursday’s US economic docket featured export and import prices, both figures easing more than expected, while industrial production (IP) contracted in October, according to data revealed by the Fed.

Other data revealed by the US Department of Labor revealed the jobs market is cooling, a sign sought by the Federal Reserve as they try to slow down the economy to grow below trend.

Daily digest movers: Mexican Peso on its path to test the psychological 17.00 figure

  • In October, Industrial Production in the United States missed estimates for a 0.3% plunge and dropped 0.6% MoM and following September’s 0.1% expansion. On a yearly basis, it fell 0.7%.
  • The Philadelphia Fed Manufacturing Index improved lightly to -5.9 versus expectations of -9 points.
  • US Initial Jobless Claims for the week ending November 11 rose 231K, exceeding forecasts of 220K, the highest jump in nearly three months.
  • The US Producer Price Index and Consumer Price Index reports in October, suggests prices are cooling down, which has increased the odds for an end of the US Federal Reserve tightening cycle.
  • Interest rates swap traders, expect 100 basis points of rate cuts by the Fed in 2024.
  • Banxico’s Deputy Governor Jonathan Heath said the Government Board continues to monitor real rates, which currently lie at around 7%.
  • Heath said Banxico wouldn’t rely on other countries – usually, Banxico reacts to the US Federal Reserve’s decisions – and said they would depend on incoming data and how inflation expectations evolve.
  • On Monday, Banxico’s Governor Victoria Rodriguez Ceja commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
  • The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
  • Mexico’s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
  • Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso extends its rally, with USD/MXN sliding below the 100-day SMA

The USD/MXN pair bias has shifted downwards in the short term, as the pair broke below the 100-day Simple Moving Average (SMA) at 17.34. The next support level would be the psychological 17.00 figure. The pair has shifted bearishly, with the 20-day SMA approaching the 17.70-17.65 area, where the 50- and 200-day SMAs converge. If the bearish cross is completed, it could pave the way for a test of the psychological 17.00 figure, ahead of challenging the year-to-date (YTD) low of 16.62, printed in July.

On the other hand, if USD/MXN buyers reclaim the 100-day SMA at 17.34, that could put into play a test of the 17.50 mark in the near term. A breach of the latter would expose key resistance levels, like the 200-day SMA at 17.64, ahead of the 50-day SMA at 17.69. Once cleared, the next resistance emerges at the 20-day SMA at 17.87 before buyers could lift the spot price towards the 18.00 figure.

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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