Mexican Peso rises to a new two-day high after Banxico’s decision, steady around 17.5500

The Mexican Peso finished Thursday’s session below 17.60, printing gains of more than 0.70%.
Mexico’s economic docket featured labor market data and the Bank of Mexico monetary policy meeting.
If USD/MXN remains below 17.6000, a drop towards 17.40s is on the cards.

The Mexican Peso (MXN) registers solid gains versus the American Dollar (USD) sponsored by overall US Dollar weakness and Mexico’s central bank sticking to its restrictive monetary policy stance as it upward revised its inflation forecasts. The USD/MXN is trading at 17.5419, gaining 0.73%.

The USD/MXN halted its rally blamed on an improvement in market sentiment, as shown by Wall Street’s ending Thursday´s session with gains. Alongside that, the fall in US bond yields weakened the US Dollar, while the latest interest rate decision by Mexico’s central bank, was a headwind for the exotic pair. Banxico’s Government board revised their inflation expectations to the upside, while voted unanimously to hold rates unchanged at 11.25%.

Daily Digest Market Movers: Mexican Peso gained ground, as the USD/MXN drops beneath 17.60

The Bank of Mexico (Banxico) held rates at 11.25% and revised up its inflation projections.
Banxico’s Government Board highlighted Mexico’s economy resilience and strong labor market as the main driver to keep initerest rates at current levels.
Mexico’s Unemployment Rate edged lower from 3.1% in July to 3.0% MoM in August, said the National Statistics Agency (INEGI).
September’s first-half inflation report in Mexico was 4.44%, down from 4.64% in August, according to the National Statistics Agency, INEGI.
The Mexican Peso recovered some ground after depreciating to levels last seen in late May 2023 and approached the 200-day Simple Moving Average (SMA) at 17.88411 on risk aversion.
Being an emerging market currency, the Mexican Peso weakens on risk aversion. Therefore, news emerging of a possible US government shutdown triggered a flow toward safe-haven assets, weakening the Mexican Peso.
The drop in Oil prices weakens the Mexican currency, as its economy relies on crude exports.
Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
In July, Moody’s lowered Mexico's rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
US Treasury bond yields jumped after September’s Federal Reserve Open Market Committee (FOMC) decision to hold rates unchanged. However, the dot plots above 5% in 2024 confirmed the Federal Reserve’s higher-for-longer mantra.
US Dollar weakness, to keep the USD/MXN pair downward biased as traders eye 17.50.

Technical Analysis: Mexican Peso

The Mexican Peso found its foot after depreciating to 17.8161 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.8410, though it is staging a comeback and trimming some of its losses, currently below the 17.6000 area. Given Mexico’s central bank's restrictive stance, the USD/MXN might pull back towards the August 3 high at 17.4258, followed by the 20-day Simple Moving Average (SMA) at 17.3069, before extending its gains. Although the Relative Strength Index (RSI) exited from overbought territory, the uptrend remains intact.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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