Mexican Peso surges against the US Dollar as USD/MXN sellers gather momentum

Mexican Peso (MXN) remains boosted by robust labor market data, as Mexico's Unemployment Rate dips to 2.9% from August's 3%.
US GDP growth at 4.9% and soaring durable goods orders may lead to another Fed rate hike.
Banxico's Deputy Governor Jonathan Heath highlights concerns over the desynchronization between monetary and fiscal policy in 2024.

Mexican Peso (MXN) has experienced a significant rally against the US Dollar (USD), erasing losses from Wednesday. This rally comes as economic data from Mexico indicates that the labor market remains strong, reflecting the resilience of the Mexican economy. Meanwhile, the United States (US) reported its fastest GDP growth rate in nearly two years for the third quarter, which could be seen as a concerning sign of inflation, potentially justifying the need for further tightening by the US Federal Reserve (Fed). Nevertheless, it failed to underpin the Greenback (USD), as the USD/MXN exchange rate currently trades at 18.16, marking a 0.85% daily decrease in favor of the Mexican Peso.

Mexico revealed the Unemployment Rate for September dipped compared to August’s 3% figure, and data was aligned with estimates of 2.9%, informed the National Statistics Agency, INEGI. Aside from economic data, the Bank of Mexico (Banxico) Deputy Governor Jonathan Heath said the desynchronization between monetary and fiscal policy due to the government's increasing debt in 2024 will add “noise” to the inflationary fight.

On the US front, Q3 GDP grew above expectations, while Durable Goods Orders for September more than tripled forecasts. On the other hand, Initial Jobless Claims rose above estimates, suggesting the labor market is easing.

Daily Digest Market Movers: Mexican Peso comes back to life as the USD/MXN drops below 18.15

Mexico’s September Unemployment Rate was 2.9%, aligned with estimates, but below August’s 3%.
US Q3 GDP grows at an annualized rate of 4.9%, higher than the 4.2% consensus.
Durable Goods Orders for September in the US rose 4.7% MoM, crushing forecasts of 1.5%, well above August’s 0.1% plunge.
US Initial Jobless Claims for the week ending October 21 rose to 210K, exceeding estimates and prior week data of 208K and 200K, respectively.
On October 24, Mexico's National Statistics Agency INEGI reported annual headline inflation hit 4.27%, down from 4.45% at the end of September, below forecasts of 4.38%.
Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.6%.
Earlier this week, S&P Global Manufacturing PMIs evidenced expansion in US manufacturing and service sectors during October.
On Friday, the US will release September's Core PCE Price Index – Federal Reserve's preferred inflation gauge – which could affect monetary policy expectations.
The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso accelerates and approaches the 20-day SMA at around 18.05

The USD/MXN upward bias remains intact, though Thursday’s price action led to a daily high of 18.42, the pair failed to break last week’s high at 18.46, exacerbating the ongoing pullback to current exchange rates. If sellers want to re-test the psychological 18.00 figure, they must reclaim the 20-day Simple Moving Average (SMA) at 18.06. On the other hand, if the pair finds support at around 18.20, that could keep buyers hopeful of challenging October’s high 18.48, ahead of 18.50.

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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