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Most recent article: Mexican Peso treads water ahead of crucial economic figures

  • Mexican Peso treads versus the US Dollar as USD/MXN posts solid gains, reaching 17.53.
  • Mexico’s economic docket revealed that Gross Fixed Investment printed a monthly decline in September.
  • Money market futures expect the US Federal Reserve to slash rates by more than 130 basis points toward the end of next year.

Mexican Peso (MXN) loses steam against the US Dollar (USD) during the North American session, as the rise in US Treasury bond yields is underpinning the US Dollar. Even though US Federal Reserve (Fed) Chair Jerome Powell pushed back against rate cut expectations, he failed. Nevertheless, the USD/MXN does not reflect that, as it trades at around 17.49, gaining more than 1.90 % daily.

Mexico's economic docket revealed that Gross Fixed Investment fell -1.5% MoM in September, reported the National Statistics Agency, INEGI. The same measures grew 21.9% in the twelve months to September, slowing from 29.2% from the August reading. Last Friday, the Bank of Mexico (Banxico) revealed that remittances in October rose by $5.81 billion. However, a stronger Peso dragged down the value of cash sent home by Mexicans living overseas. In Pesos, remittances fell 2.3% and 6.3% in real local currency terms when considering the Mexican currency appreciation, Goldman Sachs Analysts cited by Reuters said.

In the meantime, on Friday, Fed Chair Powell said he requires more evidence of the disinflationary process in the US despite acknowledging a decrease in prices. Nevertheless, he cautioned that it’s too soon to declare victory against inflation and added the Fed is ready to raise rates if needed. Despite Powell’s words, money market futures had priced in more than 130 basis points of rate cuts by the US central bank next year, with the first slash expected as soon as May 2024.

US Treasury bond yields are rising, with the 10-year benchmark note coupon at 4.255%, a tailwind for the Greenback. The US Dollar Index (DXY), which tracks the currency’s performance against a basket of six rivals, climbs 0.46%, up at 103.66.

Daily digest movers: Mexican Peso erased last Friday’s gains

  • Banxico revises economic growth upward from 3% to 3.3% for 2023 and projects the economy will rise 3% in 2024, from 2.1% previously forecast.
  • Regarding inflation prospects, the Mexican central bank foresees headline inflation at 4.4% in Q4 2023 (5.3% for core), while at the end of 2024, it is estimated at 3.4% (3.3% for core). The central bank forecasts headline and core inflation not to hit the 3% target imposed by the institution until 2025.
  • The Federal Reserve's favorite inflation gauge in October, the Core PCE Price Index rate softened from 3.7% to 3.5% YoY. Moreover, headline PCE inflation dropped from 3.4% to 3.0% YoY for the same twelve-month period.
  • On November 27, Banxico’s Deputy Governor, Jonathan Heath, commented that core prices must come down more, adding that one or two rate cuts may come next year, but “very gradually” and “with great caution.”
  • On November 24, a report revealed the economy in Mexico grew as expected in the third quarter on an annual and quarterly basis, suggesting the Bank of Mexico would likely stick to its hawkish stance, even though it opened the door for some easing.
  • Mexico's annual inflation increased from 4.31% to 4.32%, while core continued to ease from 5.33% to 5.31%, according to data on November 23.
  • A Citibanamex poll suggests that 25 of 32 economists expect Banxico's first rate cut in the first half of 2024.
  • The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
  • The same survey revealed that economists foresee headline annual inflation at 4.00% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024

Technical Analysis: Mexican Peso trips down as USD/MXN climbs above the 100-day SMA

The USD/MXN edges higher, as depicted by the daily chart, threatening to reclaim the 100-day Simple Moving Average (SMA) at 17.36. A breach of the latter could expose the November 30 daily high at 17.49, ahead of testing the 200-day SMA at 17.56. If buyers reclaim that level, then there would be nothing on the way north to challenge the 50-day SMA at 17.69.

Conversely, a bearish resumption is possible if USD/MXN stays under the 100-day SMA and slides below the 17.20 area. Once done, the first demand zone would be the 17.05 mark, ahead of the November 27 swing low of 17.03. If the pair drops below that level, the psychological 17.00 figure would be up next.

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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