- The Mexican peso remains weak awaiting the decision of the Bank of Mexico.
- Mexico’s central bank is expected to keep rates at 11.25%, although uncertainty hangs over the tone of the statement.
- USD/MXN rose on the back of strong US retail sales and fewer Americans filing for unemployment benefits.
The Mexican Peso (MXN) depreciates against the US Dollar (USD), losing part of the ground gained on Wednesday after the US Federal Reserve (Fed) decided to end its adjustment cycle, hinting that it is willing to cut rates in 2024. However, USD/MXN traders remain cautious as the Bank of Mexico (Banxico) is next with its latest decision of 2023. The pair is trading at 17.38, gaining 0.83% in the day.
Banxico is expected to keep rates unchanged at 11.25%, the level set in March 2023. Since then, Mexico’s central bank has maintained this level of rates, adding to the “higher for longer” mantra. However, the statement’s tone has gradually softened, stating that it will keep rates higher for “some time”, while some officials commented that rate cut discussions could begin in the first quarter of next year.
Daily market summary: The Mexican peso, awaiting guidance from Banxico
- A Reuters poll showed that 22 of 23 analysts expect the Bank of Mexico to keep rates at 11.25%, while one estimates a rate cut to 11%. Banxico’s decision will be known at 19:00 GMT. Annual inflation rose to 4.32% in November, although it did not dent the intentions of policymakers to relax policy next year if the data confirm the disinflation process.
- Meanwhile, USD/MXN regained some traction following strong US economic data. US retail sales rose 0.3% month-on-month in November, above estimates for a 0.1% decline.
- At the same time, the US Bureau of Labor Statistics (BLS) revealed that initial jobless claims for the week ending December 9 increased by 202,000, below the forecast of 220,000 and below 221,000. reported last week.
- The Federal Reserve’s latest decision to hold rates and its pivot to an easing policy in 2024 could keep the weakened USD/MXN below the 18.00 level by the end of the year, barring a surprise from Banxico.
- Fed officials hope to lower the federal funds rate (Federal Interest Rate) to 4.60% in 2024, although they remain dependent on data.
- The Summary of Economic Projections (SEP) updated by policymakers suggests that the US economy would grow 2.6% in 2023, up from 2.1% in September, while headline inflation is expected to fall below 3% from 3.3 % and that the underlying will slide towards 3.2% from 3.7%.
- Fed Chair Jerome Powell’s failure to address aggressive rate cut expectations sent the dollar crashing to 4-month lows.
- Money market futures estimate the Fed will cut rates by 141 basis points by the end of next year, double the Fed’s forecast of three 25 basis point cuts.
Technical Analysis: USD/MXN buyers target 100-day SMA
The USD/MXN bias remains neutral after hitting yearly lows below the 17.00 level, and since mid-September, the exchange rate has stabilized around the 17.00-18.48 range. At the time of writing, the pair reached the 100-day SMA at 17.40, but retreated towards the 17.30 area, with traders awaiting Banxico’s decision.
For a bearish continuation, the pair must fall below the current week’s low at 17.18, which could expose the 17.00-17.05 zone, a solid support level reached in November. If these two levels are broken, the pair could challenge the yearly low of 16.62.
On the other hand, buyers need to reclaim the 100-day SMA to challenge the strong resistance at the 200-day and 50-day SMA, at 17.53 and 17.62, respectively.
Frequently Asked Questions about the Mexican Peso
What is MXN?
The Mexican Peso is the legal tender of Mexico. The MXN is the most traded currency in Latin America and the third most traded on the American continent. The Mexican Peso is the first currency in the world to use the $ sign, prior to the later use of the Dollar. The Mexican Peso or MXN is divided into 100 cents.
What is Banxico and how does it influence the MXN?
Banxico is the Bank of Mexico, the country’s central bank. Created in 1925, it provides the national currency, the MXN, and its priority objective is to preserve its value over time. In addition, the Bank of Mexico manages the country’s international reserves, acts as a lender of last resort to the banks and advises the government economically and financially. Banxico uses the tools and techniques of monetary policy to meet its objective.
How does inflation impact the MXN?
When inflation is high, the value of the Mexican Peso (MXN) tends to decrease. This implies an increase in the cost of living for Mexicans that affects their ability to invest and save. At a general level, inflation affects the Mexican economy because Mexico imports a significant amount of final consumption products, such as gas, fuel, food, clothing, etc., and a large amount of production inputs. On the other hand, the higher the inflation and debt, the less attractive the country is for investors.
How does the Dollar influence the Mexican Peso (MXN)?
The exchange rate between the USD and the MXN affects imports and exports between the United States and Mexico, and may affect demand and trade flows. The price of the Dollar against the Mexican Peso is affected by factors such as monetary policy, interest rates, the consumer price index, economic growth and some geopolitical decisions.
How does the Fed’s monetary policy affect Mexico?
The exchange rate between the USD and the MXN affects imports and exports between the United States and Mexico, and may affect demand and trade flows. The price of the Dollar against the Mexican Peso is affected by factors such as monetary policy, interest rates, the consumer price index, economic growth and some geopolitical decisions.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
