Mexican Peso stays firm ahead of Mexico's inflation report

Most recent article: Mexican Peso halts rally despite upbeat market sentiment, soft US Dollar

Mexican Peso (MXN) extends gains against the US Dollar (USD), buoyed by a risk-on market mood.
Mexico’s calendar will feature mid-November inflation data, expected to show a slight increase in headline CPI and a minor decrease in core CPI.
The Bank of Mexico (Banxico) is set to release the minutes of its latest meeting, where it decided to maintain interest rates unchanged, altering its language from previous statements.

Mexican Peso (MXN) extends its gains despite being on holiday in observance of the Mexican Revolution, climbing more than 0.50% against the US Dollar (USD) amid a risk-on impulse. Broad US Dollar weakness persists, even though US Treasury bond yields advance slightly. The USD/MXN pair is trading at 17.09 after reaching a daily high of 17.25.

Mexico’s current week's economic docket will feature the release of mid-November inflation, which is expected to show a slight jump in the headline Consumer Price Index (CPI) and a minuscule reduction in core CPI. Besides that, the Bank of Mexico (Banxico) will release its latest meeting minutes after deciding to hold rates “for some time” at current levels, changing the language of the prior five meetings from “for an extended period.” Regarding rate cuts, the swap market prices in 50 bps of cuts for the first half of 2024.

In the meantime, the World Bank revealed that Mexico lacks federal and local strategies to take advantage of the nearshoring, which could weigh on the Mexican peso’s demand. The World Bank Chief Economist for Mexico, Colombia, and Venezuela, Rafael Munoz, stated, “The country's geographical proximity to the United States is not enough to assume that we will be winners of nearshoring.”

Daily digest movers: Mexican Peso rally extends to seven straight days, USD/MXN hits two-month low at 17.11

The USD/MXN is trading well below the 20, 50, 100, and 200-day Simple Moving Averages (SMAs), portraying a bearish bias.
The US Dollar Index (DXY), which measures the Greenback’s value against a basket of peers, posts losses of more than 0.20%, trading at 103.57, even though US Treasury bond yields climb.
The US 10-year Treasury bond yield is up two basis points (bps) to 4.46%.
Mexico’s Gross Domestic Product (GDP) figures will be revealed on Friday, alongside the third quarter current account.
Thursday’s economic data in the US suggests the economy is decelerating as expected by the Federal Reserve, after Industrial Production plunged in October and unemployment claims have risen the most since August.
Data published last week showed prices paid by consumers and producers in the US dipped, increasing investors' speculations that the Fed’s tightening cycle has ended.
The swap market suggests traders expect 100 basis points of rate cuts by the Fed in 2024.
The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso maintains the upper hand, with USD/MXN eyeing 17.00

The USD/MXN bearish bias remains intact, with sellers eyeing a test of the 17.00 figure, which would open the door for further losses below the figure. The next stop will be the August 28 low of 16.69 before the year-to-date (YTD) low of 16.62.

On the other hand, if the USD/MXN breaks above the 100-day Simple Moving Average (SMA) at 17.34, it could pave the way to 17.50. However, the loss of 17.28, the November 3 low, has exposed the following demand area at the 17.00 figure.

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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