- The Mexican peso is affected by a Fed official’s refusal to reduce interest rates.
- The United States economy remains strong, according to a report from S&P Global.
- New York Fed President John Williams opposes a reduction in interest rates, which favors USD/MXN.
- A Banxico survey shows economists expect 200 basis points of rate cuts by 2024.
The Mexican Peso (MXN) remains firm, reversing initial losses against the US Dollar (USD) after the end of the central bank bonanza on both sides of the border. The divergence between the US Federal Reserve (Fed) and the Bank of Mexico (Banxico) would likely keep the USD/MXN pair trading below 18.00 for the rest of the year. At the time of writing, the pair is trading at 17.18, virtually unchanged on the day, down 0.02%.
Banxico kept rates unchanged at 11.25% and maintained the tone set at the November meeting. This supported a downward movement in the pair, further distancing itself from the key resistance level of the 100-day SMA at 17.41 towards the current levels. However, US data was strong enough to prevent the pair from reaching the last cycle low of 17.03.
Meanwhile, a Banxico survey revealed that Mexican economists raised their 2024 growth forecast from 2.10% to 2.29%, while inflation is expected to reach 4% next year. Regarding monetary policy, they expect the central bank to cut rates by 200 basis points to 9.25% and that the Peso will depreciate from 18.69 to 18.53.
Daily Market Summary: Mexican Peso Strengthened by Banxico Decision
- Banxico’s decision had the unanimous support of its five members.
- The central bank acknowledged that inflation risks are tilted to the upside after the November report showed a rise in headline inflation due to “increase in non-core components” while core inflation declined.
- Banxico revised its inflation forecasts for some quarters of 2024 and 2025.
- Business activity rebounded in December, according to S&P Global. The composite index, which combines the manufacturing and services sectors, rose to 51, up from 50.7 in November and hitting a five-month high.
- The services PMI subcomponent stood at 51.3, exceeding estimates of 50.6, although manufacturing suffered a further decline, falling to 48.2, below estimates of 49.3 and 49.4 in November.
- Apart from this, the president of the New York Fed, John Williams, was against the idea of rate cuts, stating flatly that it is “premature” to think about an easing of monetary policy in March.
- Williams added that the question before the Fed board is whether policy is tight enough to ensure that inflation returns to 2%.
- On Thursday, US data showed a more resilient economy than expected, as retail sales beat forecasts, while jobless claims rose less than estimated.
- According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rate (FFR) to 4.60% in 2024, although they remain dependent on data.
- The decline in US Treasury bond yields, closely correlated with the Dollar, has slowed the advance of the Dollar, which rose 0.43% to 102.40, according to the DXY Dollar Index.
- Money market futures estimate the Fed will cut rates by 140 basis points by the end of next year, double the Fed’s forecast of three 25 basis point cuts.
Technical Analysis: The Mexican Peso will remain limited in a range around 17.00-17.60
The USD/MXN bias is neutral to bearish after falling below the 100-day SMA, considered the last line of defense by buyers. This exposed the 17.00/17.05 zone as the next demand zone, which once breached, could open the door to a retest of the yearly low of 16.62.
On the other hand, if buyers reclaim the 100-day SMA at 17.41, USD/MXN could rally towards the 200-day SMA at 17.52, followed by the 50-day SMA at 17.60. Greater increases are observed around 18.00.
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.
