Mexican Peso appreciates ahead of domestic inflation, Banxico’s decision

Mexican Peso appreciates, trading at 16.90 against US Dollar, a 0.26% decline for USD/MXN amid a busy economic week.
Mexico’s key economic events include Consumer Confidence and auto data, the Consumer Price Index (CPI) and Banxico’s policy decision.
External factors like the US employment report's impact and upcoming US economic data could further sway the USD/MXN exchange rate.

The Mexican Peso begins the week on a higher note and appreciates modestly against the US Dollar in a week characterized by a busy economic docket in Mexico. The highlights of the week would be Mexico’s inflation report and the Bank of Mexico (Banxico) monetary policy decision. The USD/MXN trades at 16.85, down 0.52%.

Mexico’s economic docket will be busy. On Tuesday, May 8, Consumer Confidence and automobile data would be revealed. The next day, inflation data is expected, along with Banxico’s decision, followed by Friday’s Industrial Production data.

Last week, Banxico’s April poll showed that private economists estimate inflation to end the year at 4.2% in 2024, underlying prices at 4.1% and the economy to grow by 2.25%. Regarding the USD/MXN, analysts revised their projections downward from 18.10 to 17.

Across the pond, traders are digesting remarks from Federal Reserve officials. Richmond Fed President Thomas Barkin said that he has not seen evidence that inflation is on track, and added that current policy is restrictive enough. Earlier, New York Fed President John Williams added that the jobs market is moderating and that the Fed is looking at the “totality” of data. He added that there would be rate cuts eventually.

Elsewhere, market players continued to digest a softer-than-expected employment report in the United States (US), which sparked speculation that the Federal Reserve (Fed) might cut rates in 2024, contrary to market participants’ belief. In addition to that, a scarce economic schedule led by Fed officials crossing the newswires, US unemployment claims and the University of Michigan Consumer Sentiment report could help dictate the USD/MXN direction.

Daily digest market movers: Mexican Peso appreciates ahead of busy schedule

Mexico’s economic calendar will feature the release of the Consumer Price Index (CPI) for April, estimated at 0.18% MoM, below March’s reading and in the twelve months to the last month, is foreseen climbing from 4.42% to 4.63%.
Banxico is expected to hold rates unchanged at 11.00%.
Mexico’s Industrial Production is projected to improve from -0.1% in February to 0.7% MoM. On a yearly basis, IP is foreseen plunging to -2.9% from 3.3% in a previous month.
US Nonfarm Payrolls missing the figures increased the likelihood that the Fed could begin to ease policy faster than expected. The US economy added just 175K people to the workforce in April, missing estimates, and trailing March’s revised 315K figure.
Data from the futures market see odds for a quarter percentage point Fed rate cut in September at 95%, versus 55% ahead of last week’s Federal Open Market Committee (FOMC) decision.
Fed speakers this week are led by Richmond Fed’s Thomas Barkin and New York Fed’s John Williams on Monday. On Tuesday, a scarce economic docket will feature Minnesota Fed’s Neil Kashkari and the RCM/TIPP Economic Optimism Index.
Last Wednesday, the Fed decided to keep the fed funds rate unchanged at 5.25%-5.50%. They acknowledged that risks to achieving the Fed’s dual mandate on employment and inflation “moved toward better balance over the past year.” Although they said there’s progress on inflation, recent data shows that it has stalled.
Fed policymakers said they would reduce the rate of shrinking its balance sheet beginning in June. This will be done by lowering the cap from $60 billion to $25 billion for the amount of Treasury maturities not reinvested every month.

Technical analysis: Mexican Peso gathers steam as USD/MXN plunges below 17.00

From a technical standpoint, the USD/MXN continues to trend lower with sellers gathering momentum as shown by the Relative Strength Index (RSI). The RSI shifted bearish, justifying the recent strength of the Mexican currency, but there’s some key levels to breach before the pair extends to new yearly lows.

If USD/MXN tumbles below the 50-day Simple Moving Average (SMA) at 16.81, that could pave the way to challenge the 2023 low of 16.62, followed by the current year-to-date (YTD) low of 16.25.

On the other hand, buyers need to reclaim the 100-day Simple Moving Average (SMA) at 16.94, followed by the 17.00 figure, if they would like to remain hopeful of higher prices. The next resistance is the 200-day Simple Moving Average at 17.17 that could pave the way to test the January 23 swing high of 17.38 and the year-to-date high of 17.92.

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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