Mexican Peso rallies more than 1%, as the USD/MXN drops below 18.94

Mexican Peso gained close to 3% during the last three trading days.
Mexico's currency is bolstered by market mood, though tomorrow's US inflation data could trigger a reversal.
Minnesota Fed President Neil Kashkari: Higher US bond yields could have been triggered by expectations of further tightening by the Fed.

Mexican Peso (MXN) took another step forward versus the US Dollar (USD) and strengthened further on Tuesday, as the USD/MXN continues to drop after hitting a multi-month high of 18.49, but the emerging market currency has recovered 297% so far, as the pair pullback towards 17.96, as of writing.

Mexican Peso (MXN) posted a solid rally against the US Dollar (USD) on Tuesday, as the USD/MXN plummeted more than 1.30%, drifting below the 18.00 figure after reaching a daily high of 18.30. However, a dovish approach by US Federal Reserve (Fed) officials opened the door for the exotic pair to slump towards the 17.93 area.

Improvement in risk appetite sparked flows toward the emerging market currency. Also, Fed policymakers stressing that high US bond yields could be the reason for skipping hiking rates at the upcoming meeting sent the Greenback (USD) drifting, as shown by the US Dollar Index (DXY), down 0.28%, at 105.77. Today, the Atlanta Fed President Raphael Bostic noted that no more increases are needed, while the Minnesota Fed President Neil Kashkari said that higher bond yields could dent the US central bank from hiking rates but stressed that if they are rising on expectations of a higher Federal Funds Rate (FFR), then the Fed must deliver. In the meantime, tensions remain high regarding the Middle East conflict after the White House pledged to support Israel after the Hamas attacks.

Daily Digest Market Movers: Mexican Peso gains more than 1% as the Greenback continues to drop

Atlanta’s Fed President Raphael Bostic: “We don’t need to increase rates anymore.”
New York Fed Consumer Inflation Expectation for 1-year at 3.7%, up from 3.6%, for a three-year period at 3%, revised from 2.8%.
The US 10-year Treasury bond yield has dropped to a new six-day low of 4.632%, a headwind for the USD/MXN.
Wall Street is trading with solid gains of between 0.70% and 1.17%, portraying improved risk appetite.
Mexico's auto parts industry is expected to register a $412 million hit to production by Friday, spurred by the United Auto Workers (UAW) union strike in the US.
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.
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.
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 challenging the 200-day Simple Moving Average at around 17.78

Mexican Peso has regained its composure, with the USD/MXN pair gaining downward traction toward the 18.00 figure due to overall US Dollar weakness. Even if the USD/MXN drops below 18.00, sellers must claim key support levels on the way down to regain control and retest the September 30 low of 17.34. First, the 200-day Simple Moving Average (SMA) at 17.78, followed by the 20-day SMA at 17.54. Conversely, if USD/MXN buyers manage to keep the exchange rate above 18.00, that could pave the way to re-test October’s high of 18.48 before challenging 18.50.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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