Mexican Peso prolongs its gains, despite Fed hawkish commentary

Mexican Peso recovered from Monday’s dip, with USD/MXN trading around 17.46.
Banxico anticipates maintaining the overnight cash rate unchanged at 11.25%, with market pricing in a steady approach for the upcoming policy decisions.
Federal Reserve's pause in rate hikes last week has led to a 3.75% appreciation of the Peso against the Dollar.

Mexican Peso (MXN) extends its gains past the mid-North American session, even though the Greenback (USD) continues climbing over most G8 currencies. Still, the emerging market Peso remains driven by the Bank of Mexico (Banxico) next Thursday's monetary policy meeting. Speculations that Banxico will keep rates high, at 11.25%, underpin the Mexican currency, as the USD/MXN is trading at 17.46, down 0.45%.

On Thursday, Banxico is expected to hold rates unchanged, as their officials have struck the markets with hawkish remarks, stating that rates need to be at the current level for a more extended period. Contrarily, last Wednesday’s Federal Reserve’s (Fed) decision to keep rates unchanged ignited speculations the Fed has finished its tightening cycle. This bolstered the Peso’s appreciation of 3.75% ever since, as the USD/MXN has plummeted from 18.12 to 17.45.

Daily digest movers: Mexican Peso shrugs off hawkish comments by Minnesota Fed President Kashkari

The US 10-year Treasury bond yield drops five basis points at 4.598% after opening at around 4.64%.
The CME FedWatch Tool shows odds of additional tightening plunging, as participants see a 20% chance for a 25-bp hike in January 2024. On the other side, rate cuts have begun to be priced in, with odds at 51.05% for a May 2024 25-bp rate cut.
On the data front, the US trade deficit widened 4.9% to $61.5 billion from $58.7 billion, more than the foreseen $59.9 billion.
Lately, Minnesota Fed President Neil Kashkari pushed back against the market's ‘dovish’ perception, saying that the economy's robustness raises the question of whether “is (policy) as tight as we (Fed) assume it currently is.” He added an uptick in inflation would warrant further tightening.
On the dovish side, Chicago Fed President Austan Goolsbee stated that progress in inflation had been made and added the conversation of how high rates need to be, which could shift to how long it would take to keep rates at this level.
Fed Governor Michelle Bowman expressed that the Fed may need to raise interest rates further to control inflation. However, she also noted that the significant increase in Treasury yields since September has led to tighter financial conditions.
Ahead in the calendar will feature more Fed speakers, with Governors Michael Barr, Christopher Waller, and Kansas City Fed President Jeffrey Schmidt.
Mexico S&P Global October Manufacturing PMI printed at 52.1, above September’s 49.8.
Mexico’s Gross Domestic Product grew by 0.9% QoQ in the third quarter on its preliminary reading, above the previous quarter and estimates of 0.8%.
On a yearly basis, Mexico’s GDP for Q3 expanded by 3.3%, above forecasts of 3.2% but trailing the previous 3.6%.
On October 24, Mexico's National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September and below forecasts of 4.38%.
Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9.

Technical Analysis: Mexican Peso buyers in charge as they eye the 100-day SMA

The USD/MXN daily chart portrays the pair as bearish, resuming its downtrend despite having undergone a slight recovery on Monday. Even though the pair formed a Japanese hammer candlestick pattern at Friday’s lows, current price action suggests the exotic pair could consolidate at around current price levels ahead of Banxico’s decision.

Hence, if the pair remains sideways, look for key support levels at Monday’s low of 17.40, followed by the 100-day Simple Moving Average (SMA) at 17.31. A breach of the latter will expose the 17.00 figure before the pair aims to test the year-to-date (YTD) low of 16.62.

Conversely, the USD/MXN's first resistance level would be the 50-day SMA at 17.65, followed by the 200-day SMA at 17.69. Once those levels are broken, look for a challenge of the 18.00 psychological mark.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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