- Mexican Peso depreciates over 1% after printing solid gains.
- Mexico's economic data shows unchanged business confidence and contraction in manufacturing activity.
- Fed hints at possible rate cut in September, driving traders to the safety of the USD.
The Mexican Peso erases earlier gains and tanks against the US Dollar, extending its weekly losses after the US Federal Reserve (Fed) kept interest rates unchanged and opened the door for a possible cut at the upcoming September meeting. This underpinned the Peso, which strengthened to a high of 18.42 before erasing those gains, as the USD/MXN trades at 18.85, over 1%.
Risk aversion keeps Wall Street trading with losses, undermining high-beta currencies like the Mexican Peso. Traders flock to the safety of the Greenback, although US Treasury bond yields plunge following Wednesday’s Fed decision.
Mexico’s economic docket revealed that Business Confidence in July was unchanged compared to June’s data, while a measure of business activity revealed by S&P Global, showed that manufacturing activity contracted for the first time since September 2023.
In the meantime, US data provides the Fed with the tools needed to lower borrowing costs after Wednesday's decision. The Federal Open Market Committee (FOMC) stated that it wouldn’t be “appropriate to reduce the target range until it has gained greater confidence” in the disinflation process, attaining the 2% goal.
Even though that was “hawkish,” Fed Chairman Jerome Powell said that if the labor market weakens substantially, “we should respond.” This was in response to a question about a September rate cut, which he said if data evolves as of late, easing in September would be “on the table.”
Following these remarks, the US Initial Jobless Claims report, which was revealed earlier, points out further weakness in the jobs market, as the number of Americans applying for unemployment benefits rose.
Other data showed that manufacturing activity weakened, spurring fears that the economy might slow down sharply than expected and inreasing recession fears.
Due to these remarks, Friday’s Nonfarm Payrolls report for July would be a crucial piece of the puzzle as the Fed pivoted towards becoming slightly concerned about employment.
Following Powell’s remarks, market participants had priced in three 75 bps of interest rate cuts toward the end of the year.
Daily digest market movers: Mexican Peso depreciates as manufacturing activity contracts
- Mexico’s S&P Global Manufacturing PMI for July contracted to 49.60, below June’s 51.10 expansion, underscoring the economy’s undergoing a slowdown.
- July’s Business Confidence was unchanged at 52.9.
- Mexico's Gross Domestic Product (GDP) for Q2 rose 0.2% QoQ, below estimates of 0.4% and a 0.3% increase in Q1. On an annual basis, GDP for Q2 2024 grew 2.2% YoY on its preliminary reading, above estimates of 2% and the previous quarter's 1.6% expansion.
- The Federal Reserve decided to hold rates unchanged yet commented that goodish data regarding inflation and further weakening in the labor market could be the triggers for action.
- US Initial Jobless Claims for the week ending July 27 rose 248K, exceeding estimates of 236K and the prior week’s 235K.
- The Institute for Supply Management (ISM) Manufacturing PMI for July plunged from 48.5 to 46.8, below estimates for an expansion of 48.8 and is the lowest reading since December 2023.
- Today’s jobless claims data and Wednesday’s ADP Employment Change in July missing the market could be a prelude to Friday’s Nonfarm Payrolls. Estimates suggest the US economy added 175K employees to the workforce, below June’s 206K.
- Data from the Chicago Board of Trade (CBOT) shows that the December 2024 fed funds rates futures contract suggests that policymakers will ease policy at least 80 basis points.
Technical analysis: Mexican Peso retreats as USD/MXN rises above 18.60
The USD/MXN climbed after falling to the 18.40 area, yet it’s recovering, with traders eyeing the 18.75 area following Wednesday’s losses. Momentum favors buyers, which, according to the Relative Strength Index (RSI), took a breather as the RSI pierced oversold levels.
For a bullish continuation, the USD/MXN must challenge the year-to-date (YTD) high at 18.99, followed by the psychological 19.00 mark. Further upside is seen at the March 20, 2023, high of 19.23, ahead of 19.50.
On the bearish side, a drop below 18.50, could sponsor a test of the psychological 18.00 mark, followed by the 50-day Simple Moving Average (SMA) at 17.97.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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