Mexican Peso climbs against US Dollar as traders await US GDP data

Most recent article: Mexican Peso dives as Banxico signals possible policy easing

Mexican Peso gains modestly as US Dollar weakens further despite pressure from rising US Treasury yields.
Mexico's January trade deficit and potential Banxico rate cut speculation influence USD/MXN dynamics.
Economic slowdown signs and CPI dip support Banxico's potential easing, hinting at upcoming volatility for the Peso.

Mexican Peso registers modest gains against the US Dollar as the latter remains weak, extending its losses to two straight days against a basket of six currencies, the so-called US Dollar Index (DXY). Nevertheless, a jump in US Treasury bond yields is capping the Peso’s advance, with the USD/MXN trading at 17.05, down 0.25%.

Mexico reported the Balance of Trade for January, which revealed the country posted a trade deficit of $302 million dollars, seasonally-adjusted, as announced by the National Statistics Agency (INEGI). The data failed to extend the USD/MXN losses amid speculation that the Bank of Mexico (Banxico) could ease monetary policy.

In an interview with El Economista, Pamela Diaz Loubet, BNP Paribas economist for Mexico, commented, “We maintain the forecast that they (Banxico) will apply a cut in March.” She said that in the latest minutes guidance for future actions, Banxico will surely explain that the March cut will be presented “to maintain flexibility and the gradual approach to cuts.”

The economic data in Mexico is expected to show an economic slowdown due to higher interest rates set by the Bank of Mexico (Banxico) at 11.25%. That, along with the latest report of the Consumer Price Index (CPI) dipping sharply for the first half of February, justifies the posture of three members of Banxico. The latest meeting minutes suggested that three policymakers are eyeing the first rate cut at the March meeting, which could put pressure on the Mexican Peso, opening the door for further upside on the USD/MXN exchange rate.

Across the border, US Durable Goods Orders plunged more than expected, while Home Prices reported by S&P/Case Shiller were mixed.

Daily digest market movers: Mexican Peso recovers as Banxico rate cut speculation grows

Mexico posted a $302 million trade deficit in January when adjusted for seasonal swings.
The latest inflation report in Mexico showed that headline and underlying inflation continued to dip toward Banxico’s goal of 3% plus or minus 1%, while economic growth exceeded estimates but finished below Q3’s 3.3%.
- Mexico’s Consumer Price Index (CPI) in the first half of February was 4.45%, down from 4.9% YoY.
- Mexico’s Core CPI slowed from 4.78% to 4.63% on an annual basis.
- Mexico’s GDP for Q4 2023 exceeded estimates of 2.4% YoY and hit 2.5%, less than Q3 2023 print of 3.3%.
Economic trade issues between Mexico and the US could depreciate the Mexican currency if the Mexican government fails to resolve its steel and aluminum dispute with the United States. US Trade Representative Katherine Tai warned the US could reimpose tariffs on the commodities.
In January, US Durable Goods Orders significantly declined to -6.1% MoM, exceeding the anticipated contraction of -4.5% and marking a steeper fall compared to December's -0.3% decrease.
In December, the S&P/Case-Shiller Home Price Index indicated a monthly decline of -0.3%, a slight acceleration in the contraction pace from November's -0.2%. On an annual basis, home prices rose by 6.1%, surpassing both expectations and the growth rate from the previous month.
The last meeting minutes of the US Federal Reserve (Fed) showed that policymakers remain hesitant to cut rates amid fears of a second round of inflation. They have expressed willingness to adjust policy when necessary but remain cautious, indicating no urgency to act. This stance is supported by current economic data suggesting strength in the economy, which could potentially revive inflationary pressure.
Market players had trimmed the odds for the first 25 basis point (bps) rate cut in June, with odds lying at 53%, while 36% of investors expected the Fed to keep rates unchanged at the current level of 5.25%-5.50%.

Technical analysis: Mexican Peso stays firm as USD/MXN meanders around 50-day SMA

The USD/MXN slid below the 17.10 area, hoovering around the 50-day Simple Moving Average (SMA) after posting back-to-back days of losses. Even though the pair dipped to a three-day low at 17.04, it remains trading sideways, awaiting a fresh catalyst to gather direction.

If sellers drag the spot price below the 17.00 figure, that will pave the way to test the current year-to-date low of 16.78, followed by the 2023 low of 16.62. Otherwise, buyers moving in could lift the USD/MXN above 17.10, followed by the psychological 17.20 figure, ahead of key resistance levels seen at the 200-day SMA at 17.26 and the 100-day SMA at 17.33.

USD/MXN Price Action – Daily Chart

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.

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