Mexican Peso weakens against US Dollar amid rising US Treasury yields
- Mexican Peso trips down against the US Dollar as USD/MXN post solid gains.
- 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) in early trading 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 is not reflecting data, as it trades at around 17.29, gaining more than 0.75% on the day.
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 trims 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 toward 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.
Mexican Peso FAQs
What key factors drive the Mexican Peso?
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.
How do decisions of the Banxico impact the Mexican Peso?
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.
How does economic data influence the value of the Mexican Peso?
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.
How does broader risk sentiment impact the Mexican Peso?
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.