Mexican Peso tumbles on Tuesday ahead FOMC minutes release

Most recent article: Mexican Peso holds ground despite weak Mexican Retail Sales

Mexican Peso faces pressure amid economic contraction concerns; falling US yields limit USD/MXN upside.
INEGI's report shows Mexico's economy shrinking by 0.7% MoM, with a modest annual growth of 1.3%.
US Treasury yield decline offers limited support to US Dollar as Conference Board's LEI dispels recession fears.

The Mexican Peso (MXN) lost traction against the US Dollar (USD) on Tuesday as traders from the United States (US) returned from the Presidents’ Day holiday. Monday’s data from Mexico suggests the economy most likely contracted in the first month of 2024, while a fall in US Treasury bond yields caps the USD/MXN upside. The pair exchanges hands at 17.06, up by 0.16%.

A report from Mexico’s National Statistics Agency (INEGI) on Monday released the Indicator of Economic Activity (IOAE), which revealed the economy contracted -0.7% MoM, even though yearly figures grew by 1.3%. While data could have triggered weakness in the Mexican Peso, the US holiday capped the emerging market (EM) currency’s fall.

Across the border, US Treasury bond yields dropped, keeping the US Dollar pressured against most currencies, except EMs. In the meantime, the Conference Board (CB) revealed its Leading Economic Index (LEI), which no longer signals an upcoming recession in the US.

Daily digest market movers: Mexican Peso trips down as traders digest Monday’s data

Mexico´s failure to resolve the steel and aluminum conflict with the US could weigh on the Mexican currency as US trade representative Katherine Tai warned Mexico that the US could reimpose tariffs on imports of the aforementioned commodities if the Mexican government doesn’t stop the increase in exports. US authorities question Mexico’s lack of transparency on imports of steel and aluminum from third countries.
Mexico’s economic schedule will gather pace on Wednesday with the release of Retail Sales, Gross Domestic Product (GDP) and February’s Mid-Month inflation data.
- Mexico’s Retail Sales are expected to rise 0.2% MoM in December and 2.5% YoY.
- GDP is projected to have grown 0.1% in Q4 2023 and 2.4% YoY.
- Mid-month underlying inflation for February is foreseen cooling from 4.78% to 4.67 YoY, while headline inflation is projected to drop from 4.9% to 4.7%.
On Wednesday, the US Federal Reserve (Fed) releases the latest Federal Open Market Committee (FOMC) Minutes alongside Fed officials crossing the wires.
Traders will get further cues from US S&P Global PMIs, Initial Jobless Claims data and the Chicago Fed National Activity Index. The latter is usually a prelude to the Institute for Supply Management’s (ISM) Manufacturing PMI.
US economic data related to price pressure should greatly influence Federal Reserve officials. Although opening the door to easing policy, Fed officials have expressed numerous times that they will not rush rate cuts.
Fed’s Bostic said patience is required, and he foresees two rate cuts, which could begin in the summer if the data justifies it. Fed’s Daly said, “We will need to resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they have trimmed odds for March and May.

Technical analysis: Mexican Peso prints minimal losses as USD/MXN breaks above 17.05

On Monday, I wrote, “The USD/MXN seesaws near the 17.05 mark, below the 50-day Simple Moving Average (SMA) at 17.09.” At the time of writing, the pair remains within the aforementioned level, though the Relative Strength Index (RSI) has begun to edge higher at the risk of shifting bullish. That and the USD/MXN clearing the 50-day SMA could open the door to test the 200-day SMA at 17.28. Further upside lies at the 100-day SMA at 17.38, before the pair rallies toward 17.50.

Conversely, sellers must drag the exchange rate below the 17.00 figure if they would like to remain hopeful of challenging last year’s low of 16.62.

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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