Mexican Peso gains despite Moody’s negative outlook

Mexican Peso appreciates and shrugs off bad credit outlook review, strong US data.
Moody's revises Mexico’s credit outlook to negative, citing concerns over judicial changes impacting economic stability.
Peso strengthens in spite of Banxico’s rate cut with inflation expectations remaining above target.

The Mexican Peso recovered some ground against the US Dollar during the North American session, shrugging off Moody’s adjustment on Mexico’s credit outlook and upbeat US Retail Sales data. At the time of writing, the USD/MXN trades at 20.34, down by 0.24%.

Due to recent constitutional changes, Moody’s Ratings changed the Mexico’s credit outlook from stable to negative.

“The constitutional overhaul risks eroding checks and balances of the country’s judiciary system, with potential negative impact to Mexico’s economic and fiscal strength,” Moody’s said in a statement Thursday.

Other ratings agencies, like Fitch and S&P Global, kept Mexico’s creditworthiness stable. Fitch Ratings assigns Mexico BBB-, the lowest level above junk, while S&P Global Ratings has it a notch higher.

In the meantime, the Minister of Finance, Rogelio Ramirez de la O, presented the 2025 economic package at the Chamber of Deputies. The package projections hint that the economy will grow by 2% to 3%, and the fiscal deficit will be 3.9% of the Gross Domestic Product (GDP) for 2025.

The Peso has extended its gains to three days even though the Bank of Mexico (Banxico) decided to lower borrowing costs to 10.25% as expected despite recognizing that inflation risks are tilted to the upside.

Banxico expects headline inflation to end 2024 at 4.7%, up from 4.3% in the previous forecasts and well above the 3% goal.

In addition, October’s US Retail Sales, revealed by the Bureau of Labor Statistics (BLS), crushed estimates. Other data revealed by the Federal Reserve (Fed) showed that Industrial Production for October improved but remained in contractionary territory.

Meanwhile, Fed officials continued to make news. The Boston Fed’s Susan Collins reiterated Fed Chair Jerome Powell’s words from Thursday about the Fed not needing to rush rate cuts. Collins said, “I don’t see a big urgency to lower rates, but I want to preserve a healthy economy.”

Daily digest market movers: Mexican Peso bolstered by a soft US Dollar

A soft US Dollar undermines the USD/MXN. The US Dollar Index (DXY), which tracks the performance of the Greenback against six currencies, dropped 0.24% to 106.61.
Banxico’s Governing Council voted unanimously to lower borrowing costs from 10.50% to 10.25%, as expected. Governors added that although inflation remains high and requires a restrictive policy, the disinflation process “implies that it's adequate to reduce the level of monetary policy restriction.”
Officials expect inflation to converge to the 3% goal by the last quarter of 2025.
US Retail Sales for October rose by 0.4% MoM, exceeding forecasts of 0.3% but missing September’s 0.8% increase. Yearly, figures grew by 2.8%, up from 2%.
Industrial Production for the same period, shrank -0.3% as foreseen, though improved from -0.5% in September.
Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 24 bps of Fed easing by the end of 2024.

USD/MXN technical outlook: Mexican Peso steadies as USD/MXN drops below 20.40

The USD/MXN upward bias remains, although the Peso has gained some ground. For a bearish continuation, sellers must push the exchange rate below 20.00. In that outcome, bears could challenge the 50-day Simple Moving Average (SMA) to 19.74, followed by the psychological 19.50.

Conversely, if USD/MXN resumes its uptrend and buyers regain 20.50, it will expose the current week’s peak at 20.69. Once surpassed, the year-to-date (YTD) high of 20.80 emerges as the next ceiling level before testing 21.00. A breach of the latter and the March 8, 2022, peak at 21.46 would emerge as the next resistance.

Oscillators like the Relative Strength Index (RSI) are bullish, suggesting that further upside in the USD/MXN is projected.

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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