- Mexican Peso strengthens against US Dollar as core PCE inflation falls below expectations, boosting prospects for Fed rate cuts.
- Ongoing political uncertainties in Mexico dampen Peso’s demand.
- Banxico cuts GDP forecasts for 2024 and 2025, indicating slower growth and potential rate cuts.
The Mexican Peso recovered some ground on Friday against the Greenback after the Federal Reserve’s (Fed) preferred inflation gauge, the core Personal Consumption Price Expenditures Price Index (PCE), was a tenth lower than expected, suggesting that the disinflation process has evolved. This gives the Fed the green light to begin cutting rates, which is a headwind for the US Dollar. At the time of writing, the USD/MXN trades at 19.64, down 1.01%.
Mexico’s economic docket was absent during the week. However, political uncertainty linked to the judiciary reform and the dissolution of autonomous bodies in bills pushed by President Andres Manuel Lopez Obrador might keep investors nervous as the new Mexican Congress takes office.
Aside from this, the Bank of Mexico (Banxico) is downwardly reviewing economic growth as it estimates the Gross Domestic Product (GDP) for 2024 to drop from 2.4% to 1.5% and from 1.5% to 1.2% for 2025 after revealing its Q2 2024 quarterly revision.
Banxico Governor Victoria Rodriguez Ceja warned that adjustments to the primary reference rates would be gradual only when macroeconomic conditions allowed them.
Regarding this, most banks expect Banxico to reduce rates by at least 50 basis points (bps) for the remainder of 2024. This would pressure the Mexican currency, which has already depreciated 15.38% in year-to-date (YTD) figures.
Across the border, the US Bureau of Economic Analysis revealed that the disinflation process continues. The Fed’s favorite inflation gauge, the core PCE, dipped on an annual basis, while the headline figures remained unchanged.
In the meantime, the University of Michigan (UoM) Consumer Sentiment survey in August improved for the first time in five months and exceeded the preliminary reading announced two weeks ago.
The UoM poll revealed that inflation expectations for one-year dipped, while for a five-year period they remained unchanged.
Daily digest market movers: Mexican Peso counterattacks, shrugging off political uncertainty
- Mexican President Andres Manuel Lopez Obrador's decision to pause relations with the US and Canadian ambassadors this week will continue to weigh on the Mexican Peso.
- US core PCE reading for July showed that prices rose by 2.6%, unchanged from the previous month but less than the 2.7% YoY estimates. The headline PCE stood at 2.5% YoY, beneath forecasts of a 2.6% rise.
- Same report reveals that consumer spending rose while income growth was sluggish, raising doubts that Americans would keep the pace.
- According to the UoM, US Consumer Sentiment in August rose from 66.4 in July to 67.9. Inflation expectations for one year dipped from 2.9% to 2.8%, and for a medium-term — five years — stood at 3%.
- Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 97 basis points (bps), according to the fed funds rate futures contract for December 2024.
Technical outlook: Mexican Peso climbs as USD/MXN drops below 19.70
The USD/MXN uptrend remains intact, although the exotic pair dived toward the 19.65 figure as traders grow confident the Fed will begin its easing cycle, reducing the interest rate differential between the US and Mexico.
The Relative Strength Index (RSI) is mixed, in bullish territory but aiming lower, showing that sellers have the upper hand in the near term.
On further USD/MXN weakness, the first support would be 19.50. A breach of the latter will expose the August 23 swing low of 19.02 before giving way for sellers eyeing a test of the 50-day Simple Moving Average (SMA) at 18.59.
However, if the pair remains above 19.50, a challenge of the 20.00 figure is on the cards. Once that level is surpassed, the next stop would be the year-to-date (YTD) high at 20.22, followed by the September 28, 2022, daily high at 20.57. If those two levels are surrendered, the next stop would be the August 2, 2022, swing high at 20.82, ahead of 21.00.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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