Mexican Peso depreciates against US Dollar due to falling US yields, mixed CPI data

Most recent article: Mexican Peso drops as US high inflation might dent Fed rate cuts

Mexican Peso rally pauses, influenced by mixed inflation data and Banxico rate cut.
Core CPI deceleration backs Banxico move, yet annual inflation worries linger.
USD/MXN's next moves are eyed with upcoming US inflation data focusing traders on 16.00, 17.00 levels.

The Mexican Peso loses steam against the US Dollar on Tuesday after refreshing almost nine-year highs of 16.26. Mexico’s inflation data was mixed, though the emerging market currency tumbled more than 0.5%, as price action seems overextended. The USD/MXN trades at 16.37.The Mexican Peso loses steam against the US Dollar on Tuesday after refreshing almost nine-year highs of 16.26. Mexico’s inflation data was mixed, though the emerging market currency tumbled more than 0.5%, as price action seems overextended. The USD/MXN trades at 16.37.

Mexico’s Consumer Price Index (CPI) was lower than estimated as the disinflation process continued. In the same tone, core CPI on a yearly and monthly basis decelerated, justifying the Bank of Mexico's (Banxico) decision to lower rates on March 21. However, not everything was good news for the central bank as the yearly CPI exceeded estimates.

Maria Marco, an analyst at Monex Europe, said, “Given that at the March meeting the entire Board of Governors devoted much of their efforts to stressing that the balance of risks to inflation remains skewed to the upside, today’s data confirms our view that Banxico didn’t embark on an uninterrupted sequence of rate cuts last month.”

That said, USD/MXN traders' focus shifts toward the next inflation report in the United States (US). Softer data could drive the USD/MXN toward the 16.00 psychological barrier. Otherwise, the pair could surpass the 16.50 figure with buyers eyeing 17.00.

Daily digest market movers: Mexican Peso slips post inflation report

Mexico’s CPI rose 0.29% MoM, according to the National Statistics Agency (INEGI). This was lower than the expected 0.36% increase and higher than the 0.09% rise noted in February.
Core inflation registered a rise of 0.44%, which was lower than the 0.51% that economists had forecast and below the 0.49% increase in February.
US Treasury bond yields plunged sharply, with the 10-year benchmark coupon down six basis points to 4.362%. Consequently, the US Dollar Index (DXY) remains virtually unchanged with the DXY standing at 104.14, up by a minimal 0.02%.
Market participants' expectations that the Fed would cut rates three times this year remain volatile, according to the CME FedWatch Tool. The odds for June edged from 52% to 57.7%, while for July, they stood at 74%.

Technical analysis: Mexican Peso loses momentum as USD/MXN jumps from 2015 lows

The USD/MXN fell to a new nine-year low at around 16.25, with traders posing to drive the exchange rate below that level toward the 16.00 figure. Even though the Relative Strength Index (RSI) turned oversold, sellers are gaining momentum. Therefore, the next support would be the psychological 16.00 figure.

Nevertheless, the pair made a U-turn, with the USD/MXN about to form a “bullish engulfing” chart pattern that could drive the exchange rate higher. The first resistance would be the psychological 16.50 mark, followed by last year’s 16.62 mark. Once those two levels are cleared, buyers will target 17.00.

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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