Mexican Peso climbs to two-day high amid strong US Dollar

Mexican Peso strengthens after US inflation report and unexpected rise in Initial Jobless Claims.
Banxico's latest report highlights ongoing disinflation, suggesting potential for future rate cuts.
Market anticipates Banxico's March 21 policy meeting amid discussions on gradual rate adjustments.

The Mexican Peso appreciated against the US Dollar in early trading on Thursday after an inflation report in the United States was revealed, while Initial Jobless Claims rose above expectations for the first time in four consecutive weeks. Even though the Greenback (USD) advances against the other six currencies, as revealed by the US Dollar Index (DXY), the Peso remains strong. The USD/MXN stands at 17.04, down 0.25% following the data release.

Mexico’s economic docket saw an uptick in the Unemployment Rate but not substantial enough to move the USD/MXN. On Wednesday, the Bank of Mexico (Banxico) announced its report for the last quarter of 2023, noting that the disinflation process continued while Governor Victoria Rodriguez Ceja said the real ex-ante rate hit 7.47%, exceeding the Bank’s neutral rate, thus opening the door for reducing interest rates.

Deputy Governors Jonathan Heath and Omar Mejia subscribed to the idea that rate adjustments must be gradual, with Heath opening the door for a 25-basis-point cut and then reassessing the restrictiveness of the policy. He added that declaring victory over inflation is too premature and that cutting the benchmark rate more than he suggested would be a “big mistake.”

In that regard, Deputy Governor Irene Espinosa said Banxico’s Governing Council should consider external and internal factors affecting inflation. Her colleague Galia Borja adopted cautious decision-making based on emerging inflation data. Given the backdrop, USD/MXN traders are eyeing Banxico’s next monetary policy meeting on March 21.

On the other hand, the US Bureau of Economic Analysis (BEA) revealed that the Personal Consumption Expenditure (PCE) Price Index climbed as expected. Regarding the Federal Reserve’s preferred gauge for inflation, the Core PCE rose as expected, though it justified Fed officials' rhetoric against premature interest rate cuts.

Daily digest market movers: Mexican Peso boosted by US inflation report

Mexico’s economy is expected to slow down due to higher interest rates set by Banxico at 11.25%. That’s the main reason that sparked a shift in three of the five governors of the Mexican Central Bank, who are eyeing the first rate cut at the March 21 meeting.
Banxico updated its economic growth projections for 2024 from 3.0% to 2.8% YoY and maintained 1.5% for 2025.
Expectations for the Mexican central bank to ease monetary policy in March remain high, with investors projecting 75 basis points of easing over the next six months. This means the Mexican interest rates, currently standing at 11.25%, would be lowered to 10.50% in the first half of 2024.
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 economic data released during the week thus far:
- The Unemployment Rate rose from 2.6% to 2.9% YoY in January, exceeding estimates of 2.8%.
- The Balance of Trade for January revealed the country posted a trade deficit of $302 million.
- 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.
January’s US PCE Index rose 2.4% YoY from 2.6%, as expected. The so-called Core PCE, which excludes volatile items, increased by 2.8% YoY, below December’s 2.9%, and aligned with the consensus.
Initial Jobless Claims in the US for the week ending February 24 grew 215K, exceeding estimates of 210K and the previous reading of 202K.
The USD/MXN fell following the US data release as market players increased the odds for the first 25-basis-point (bps) rate cut in June, from 49% to 54.1% a day ago. Meanwhile, 33% of investors expected the Fed to keep rates unchanged at the current level of 5.25%-5.50%.

Technical analysis: Mexican Peso climbs as USD/MXN hovers around 50-day SMA

The USD/MXN trades near the 50-day Simple Moving Average (SMA), which stands at 17.06, after the pair snapped three days of losses but resumed its downtrend on Thursday. The bearish bias is confirmed by the Relative Strength Index (RSI) staying below the 50-midline, keeping sellers hopeful of retesting the 17.00 psychological level. If traders clear that level, the exotic pair could dive to the year-to-date (YTD) lows of 16.78, followed by last year’s low of 16.62.

Conversely, if buyers reclaim the 17.20 area, further gains are seen. The next supply zone would be the 200-day SMA at 17.26 and the 100-day SMA at 17.31.

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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