Mexican Peso stays firm against US Dollar amid Fed Bostic comments

Most recent article: Mexican Peso weakens against US Dollar despite Mexico’s inflation data

Mexican Peso soars as mixed economic data from the United States, undermined the Greenback.
Mexico’s Consumer Confidence deteriorates as households are concerned about the future economic outlook.
USD/MXN tumbles toward 16.80 as sellers eye 2023’s low of 16.62.
Atlanta’s Fed Bostic shifted slightly hawkish after reiterating that he expects 50 bps of rate cuts toward year’s end.

The Mexican Peso (MXN) posts modest daily gains of 0.20% against the US Dollar (USD) as the Federal Reserve (Fed) Atlanta’s President Raphael Bostic crosses the newswires and emphasizes the current interest rates, can drive inflation towards the Fed’s goal. Consequently, the USD/MXN recovers some ground after hitting a daily low of 16.78 and trades at around 16.81, nearby multi-month lows.

Bostic added the US central bank can let “current” restrictive policy continue to work to slow inflation and added the Fed is in a “very strong position.” He added that many economic measures are back at pre-pandemic levels and repeated that he sees two-quarters of percentage points of rate cuts by the end of the year.

Earlier, Mexico’s economic docket featured Consumer Confidence for December, which deteriorated, according to the National Statistics Agency known as INEGI. Across the border, last Friday’s Nonfarm Payrolls report for December depicted the labor market is in better shape than estimated. Nevertheless, in the near term, hiring could begin to slow down as business activity reported by the Institute for Supply Management (ISM) showed the Manufacturing PMI stood in recessionary territory, while the Services PMI clung to 50.7, at the brisk of turning contractionary.

Daily digest market movers: Mexican Peso remains firm, extending its gains against the US Dollar

Mexico’s Consumer Confidence in December dropped slightly from 47.3 to 46.8 as consumers became more worried about the future economic outlook amongst households. In regard to the country’s outlook, consumers expect an economic slowdown, tough current conditions, sales of durable goods are expected to take a hit, as the poll showed.
Last week’s economic data in the US was mixed. Although the economy added 216K jobs, exceeding forecasts, usually, it’s the latest piece of data that feels the pain of monetary policy tightening. Contrarily, the ISM Manufacturing and Services PMI usually lead the economy, and even though the Services PMI stood at expansionary territory, it is slowing faster than expected.
On Saturday, the President of the Dallas Federal Reserve Bank, Lorie Logan, said the Fed shouldn’t rule out another rate hike due to the recent easing in financial conditions. She added the US central bank should consider the slow the pace of its balance sheet reduction.
The recent meeting minutes from Banxico (the Central Bank of Mexico) indicate that the institution might start considering the relaxation of its monetary policy, albeit cautiously. Four members of the Governing Council emphasized the importance of being prudent in both evaluating and communicating any decisions regarding rate reductions. Meanwhile, one member voiced the opinion that it might be time to start discussing potential rate cuts.
Last Tuesday, Mexico’s S&P Global Manufacturing PMI for December came out at 52.0, below November’s 52.5, suggesting the economy is slowing down amid Banxico’s tightening cycle.
On Wednesday, Business Confidence in Mexico improved to 54.6 from 54.0 in November, although it failed to underpin the Mexican Peso, which remained weak during the session.

Technical analysis: Mexican Peso buyers remain in charge as the USD/MXN drifts lower

The USD/MXN resumed its downtrend, and it’s accelerating its pace toward testing last year’s low of 16.62. A breach of the 16.80 area would expose the 16.69 August 28 swing low, followed by the 2023 low of 16.62.

On the flip side, if sentiment shifts bullish on the US Dollar, the exotic pair could reclaim the 17.00 figure, followed by the 17.05 mark. Once those two resistance levels are surpassed, up next would be 17.20, followed by the convergence of the 50, 100, and 200-day Simple Moving Averages (SMAs) at the 17.29/41 area.

Also read: Mexican Peso Price Annual Forecast: Which factor would impact most in 2024, economics or politics?

USD/MXN Price Action - Daily Chart

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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