Mexican Peso recovers amidst falling US bond yields and rising Oil prices

Mexican Peso appreciates late in the New York session as US Treasury bond yields plunge.
Mexico’s inflation edges lower toward the Bank of Mexico’s target.
The ongoing UAW strike in the US would weigh on Mexico's auto parts industry and impact the USD/MXN exchange rate.

Mexican Peso (MXN) finished the session on a higher note versus the US Dollar (USD), after weakening during the overnight session by more than 1%, but falling US Treasury bond yields and rising Oil prices augmented appetite for the emerging market currency. Therefore, USD/MXN is trading at 18.18, registered losses of 0.06%.

US Treasury bond yields sank late in the New York session, although the US bond markets were closed in the observance of Columbus Day. The US 10-year Treasury bond yield fell 16 basis points and finished at around 4.638%, a headwind for the Greenback (USD). The US Dollar Index (DXY), which tracks the performance of the buck against six currencies, fell 0.06% and clung to the 106.00 mark for the second straight day.

Summarizing the session, Federal Reserve officials adopted a cautious stance, a tailwind for the Mexican Peso. In the meantime, Mexico’s inflation eased towards the Bank of Mexico (Banxico) 3% plus or minus 1% target, though core inflation remained above the 5.50% threshold. The effects of the United Auto Workers (UAW) union strike are beginning to be felt in Mexico. According to Reuters, “Mexico's auto parts industry is expected to register a $412 million hit to production by Friday.”

Daily Digest Market Movers: Mexican Peso finished Monday’s session strong, with USD/MXN below 18.20

The US Federal Reserve Vice-Chair Jefferson commented that it’s too soon to celebrate victory on inflation, adding that current policy is restrictive.
Dallas Fed President Lorie Logan said she’s focused on inflation, and although financial conditions had tightened, she favors keeping rates higher for Longer.
Mexico’s Consumer Price Index (CPI) grew by 4.45% YoY in September, below the 4.47% of estimates.
The core CPI inflation in Mexico stood stickier at 5.76% YoY, as widely estimated, but has broken below the 6% threshold.
A Citi Banamex poll showed economists estimate headline inflation at 4.70% and core at 5.09% for the year’s end.
Analysts polled by Citi Banamex foresee the USD/MXN to end 2023 at 17.80, up from 17.60, and for 2024 at 18.86, up from 18.70 two weeks ago.
On October 4, 2023, the IMF raised Mexico’s growth projection in 2023 from 2.6% to 3.2% and from 1.5% foreseen in July to 2.1% for 2024.
Banxico’s September poll amongst economists reported that interest rates are expected to remain at 11.25% while inflation would dip to 4.66%.
The same poll shows the USD/MXN exchange rate is set to finish at around 17.64, down from 17.75.
Mexico’s S&P Global Manufacturing PMI for September came at 49.8, sliding to contractionary territory and below August’s 51.2, as the economy loses steam.
The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
Banxico’s Government Board highlighted Mexico’s economic resilience and the strong labor market as the main drivers to keep inflation at the current interest rate level.

Technical Analysis: Mexican Peso at the brisk of depreciating to 19.00

The USD/MXN daily chart portrays the exotic pair as bullish-biased after hitting a new cycle high of 18.48 on Friday, above the April 5 high of 18.40. If buyers reclaim 18.50, that will extend the Mexican Peso’s losses with the pair aiming towards the March 24 swing high at 18.80, which, if cleared, would expose the 19.00 figure. On the other hand, if sellers reclaim the 200-day Simple Moving Average (SMA) at 17.79, that would pave the way to challenge the September 30 low of 17.34.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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