Mexican Peso soars and breaks key level as bull's eye 2023 high

Most recent article: Mexican Peso overcomes early dip and challenges strong US Dollar

Mexican Peso benefits from US Dollar weaknesses, shrugging off Banxico rate cut.
Banxico Governor emphasized cautious approach to rate adjustments, stressing ongoing inflation battle.
Mixed economic updates from both Mexico and the US leave traders weighing Fed's rate cut discourse against actual data.

The Mexican Peso capitalized on broad US Dollar weakness on Monday, climbing more than 0.1% in the mid-North American session. A risk-off impulse was no excuse for the Mexican currency’s bulls despite last week’s interest rate cut by the Bank of Mexico (Banxico). Additionally, traders ignored comments from Federal Reserve’s (Fed) members as the Greenback remains pressured. The USD/MXN trades at 16.69, down 0.28%.

Mexico’s economic docket is absent, though Banxico Governor Victoria Rodriguez Ceja crossed the wires. She said that the first rate cut does not mean the battle against inflation is over. She added that the central bank would be gradual, and adjustments to the main reference rates would be made taking into account upcoming data.

Last week, the National Statistics Agency (INEGI) revealed that the economy shrunk in January from December, while mid-month inflation increased on a monthly and annual basis.

Across the border, Federal Reserve officials had crossed the newswires. Atlanta Fed President Raphael Bostic said that he favors one rate cut this year, while Chicago Fed President Austan Goolsbee foresees three decreases to the fed funds rate (FFR). At the same time, Fed Governor Lisa Cook commented that a premature rate cut could increase the risk of inflation becoming entrenched.

The US schedule features housing market data, the Chicago Fed National Activity Index and the Dallas Fed Manufacturing Index.

Daily digest market movers: Mexican Peso capitalizes on US Dollar weakness on Monday

Banxico Governor Victoria Rodriguez Ceja said, “When macroeconomic conditions and the inflationary outlook allow us to make additional adjustments to the reference rate to the one we already have, I consider that they would be gradual.”
Mexico’s economy contracted for the fourth time in January. The Indicator of General Economic Activity plunged -0.6% MoM, below estimates of a 0.3% expansion, and slowed compared to December, missing estimates of 2.6% to print at 2%. Inflation in Mexico exceeded estimates of 4.45%, increasing by 4.48%, while core figures jumped above the consensus of 4.62% YoY to 4.69%.
The outlook in Mexico suggests the economy is stagnating. A weak retail sales report, private spending falling sharply, and a contraction in economic activity justified Banxico’s rate cut. Nevertheless, they face stubbornly stickier inflation, keeping policymakers on their toes.
The US economic calendar has featured Fed speakers led by Atlanta Fed President Raphael Bostic, who said he expects just one rate cut this year, adding that cutting rates too soon could be more disruptive. At the same time, his colleague, Chicago Fed President Austan Goolsbee, adheres to the majority of the board and expects three cuts, though he said he needs more evidence of inflation “coming down.”
Recently, Fed Governor Lisa Cook echoed Bostic's comments, saying that cutting too soon increases the risk of inflation becoming entrenched. She added that the Fed’s dual mandate goals are moving toward better balance.
New Home Sales for February decreased -0.3% MoM from 0.664 million to 0.662 million. The Chicago Fed National Activity Index improved from -0.54 to 0.05. According to the Chicago Fed, all four categories that compose the index improved on the month.
Recently, the Dallas Fed Manufacturing Index plunged further from -11.3 in February to -14.4 in March. Wages and prices increased during the month, while expectations for future manufacturing activity generally improved.

Technical analysis: Mexican Peso gathers momentum as USD/MXN falls below 16.70

The USD/MXN remains downwardly biased after hitting 16.94, last week’s high. Since then, the exotic pair has tumbled 1.45% and is poised to register additional losses. If the pair drops below the current year's low of 16.64, that could clear the path to test last year’s cycle low of 16.62 and October 2015’s low of 16.32.

For a bullish scenario, traders must reclaim the current week’s high of 16.94, ahead of the 17.00 figure. Up next lie key dynamic resistance levels like the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.11, and the 200-day SMA at 17.20.

USD/MXN Price Action – Daily Chart

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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