Mexican Peso holds steady amid positive US data boosting the US Dollar

Most recent article: Mexican Peso weakens as Banxico’s Governor opens the door to rate cuts

Mexican Peso dampened by a Fed official pushing back against interest rate cuts.
The economy in the United States remains solid, according to a report by S&P Global.
New York Fed President John Williams pushes back against rate cuts, a tailwind for USD/MXN.
A Banxico survey shows economists expect 200 bps of rate cuts for 2024.

The Mexican Peso (MXN) would end the day with losses against the US Dollar (USD) after the central bank bonanza on both sides of the border is finished. The divergence between the US Federal Reserve (Fed) and the Bank of Mexico (Banxico) would likely keep the exotic pair trading below 18.00 for the remainder of the year and would finish the week with gains of 0.55%. Yet, in the day, the USD/MXN is trading at 17.23, gaining 0.23%.

Banxico held rates unchanged at 11.25% and maintained the tone set in the November meeting. That sponsored a leg-down in the pair, further distancing from the 100-day Simple Moving Average (SMA) key resistance level at 17.41 toward current exchange rate levels. However, the United States (US) data was solid enough to keep the pair from reaching the 17.03 latest cycle low.

In the meantime, a Banxico survey revealed that Mexican economists raised their growth forecast for 2024 from 2.10% to 2.29%, while inflation is expected to hit 4% next year. Regarding monetary policy, they expect the central bank to cut rates by 200 bps to 9.25 and the Peso to depreciate from 18.69 to 18.53.

Daily Digest Market Movers: Mexican Peso bolstered by Banxico hawkish hold

Banxico’s decision was unanimously supported by its five members.
The central bank acknowledged that inflation risks are tilted to the upside after November’s report witnessed headline inflation rising due to the “rise in non-core components” while core inflation eased.
Banxico revised its inflation projections for some quarters of 2024 and 2025.
Business activity picked up in December, according to S&P Global. The composite index, which combines manufacturing and services sectors, increased to 51, exceeding November’s 50.7 and hitting a five-month high.
The services PMI subcomponent came in at 51.3, exceeding forecasts of 50.6, though Manufacturing slipped further, dropping to 48.2, below estimates of 49.3, and November’s 49.4
Aside from this, the New York Fed President John Williams pushed back against the idea of rate cuts, emphatically saying it’s “premature” to think about easing policy in March.
Williams added that the question around the Fed board is whether the policy is sufficiently restrictive enough to ensure inflation returns to 2%.
US data on Thursday painted the economy as more resilient than expected as Retail Sales exceeded forecasts, while unemployment claims rose less than estimates.
According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rates (FFR) to 4.60% in 2024, though they remain data-dependent.
The fall in US Treasury Bond yields, which are closely correlated to the Greenback (USD) has stalled relief for the USD, which is rising 0.43%, up at 102.40, according to the US Dollar Index (DXY).
Money market futures estimate the Fed will slash rates by 140 basis points toward the end of next year, twice the Fed’s forecasts of three 25 bps cuts.

Technical analysis: Mexican Peso to remain range-bound at around 17.00-17.60

The USD/MXN bias is neutral to downwards biased after dropping below the 100-day SMA, seen as the last line of defense by buyers. That exposed the 17.00/05 area as the next demand area, which once surpassed, could open the door for a retest of the year-to-date (YTD) low of 16.62

On the other hand, if buyers reclaim the 100-day SMA at 17.41, the USD/MXN could rally toward the 200-day SMA at 17.52, followed by the 50-day SMA at 17.60. Further upside is seen at around 18.00.

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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