Mexican Peso registers minimal losses against US Dollar on calm Monday’s session

Most recent article: Mexican Peso tumbles as US Dollar strengthens with traders paring Fed rate cut bets

Mexican Peso gets hit by sentiment shifting, down 0.13% against Greenback.
Mexico’s economy continues to slow down amid the ongoing disinflation process.
Expectations that Banxico would begin easy monetary policy in Q1 2024 could pave the way for further upside in USD/MXN.

The Mexican Peso (MXN) extends its losses in the mid-North American session against the US Dollar (USD) this amid thin liquidity conditions in the observance of Martin Luther King (MLK) day in the United States (US). The emerging market currency is soft despite interest rate traders expecting the US Federal Reserve (Fed) to cut rates by 170 basis points in 2024, undermining the prospects of the buck. Nevertheless, the USD/MXN trades at 16.87 on Monday, gaining 0.06%.

Risk aversion is taking its toll on European stocks, bolstering the Greenback (USD), a headwind for the Mexican currency. Even though the Peso continues to edge lower, futures positions on the Mexican Peso show investors had remained long for the last 44 weeks, according to data revealed by the Chicago Board of Trade (CBOT). Net speculative contracts rose by 88,439 longs, -0.7% less than last week’s 89,100.

Despite that, the USD/MXN had resumed its uptrend on speculation that the Bank of Mexico (Banxico) will begin easing its monetary policy. However, the latest inflation report could prevent them from relaxing monetary conditions.

Daily digest market movers: Mexican Peso retreats as investor mood deteriorates

The latest US inflation report on the producer side affected the markets the most, according to Société Generale. Even though the Consumer Price Index (CPI) in the US was hotter than expected last Thursday, a day later the Producer Price Index (PPI) came lower than estimates, prompting investors to increase odds for a Fed rate cut in March from 78% to 83%. Nevertheless, those odds had eased to 70% at the time of writing.
Mexican economic data revealed throughout the month suggests the country faces some challenges. Inflation rose from 4.32% to 4.66% YoY in December, exceeding the 4.55% forecast. The same report revealed that underlying inflation is easing toward 5% but remains high, which might deter Banxico officials from easing policy in the first quarter of 2024.
In addition to that, Industrial Production plunged -1.0% MoM after achieving eight months of expansion, indicating that higher interest rates set by Banxico at 11.25% are beginning to impact the economy.
In that regard, Auto Production for December slumped from 18.1% to -9.9% YoY.
Confidence surveys released on January 3 and 8 showed that businesses' confidence remained high at 54.6, bolstered by “nearshoring” prospects. However, consumers have begun to turn pessimistic as they expect inflation and economic deceleration to weigh on their economies.
The week’s Mexican economic docket will feature Retail Sales for November, expected to remain unchanged at 3.4% YoY, according to the consensus.
Last Wednesday, the World Bank revised its economic projections for Mexico in 2024. The updated forecast anticipates that Mexico's Gross Domestic Product (GDP) will grow by 2.6%, an increase from the bank’s initial prediction of 1.9%. Analysts at the bank attribute this expected growth to the rise in near-shoring activities, which they believe will positively impact the Mexican economy.
Although the recent meeting minutes from Banxico (the Central Bank of Mexico) suggest that the central bank might contemplate easing its monetary policy, the inflation report for December could hinder any move toward policy relaxation.
Analysts at Standard Chartered noted, “We expect the policy rate to be lowered to 9.25% by end-2024, although an official downward revision in the output gap could open the door for more aggressive rate cuts.”
On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.

Technical analysis: Mexican Peso weakens as USD/MXN climbs toward 16.90

The USD/MXN remains downward biased, but today’s bullish impulse can open the door to challenging the 17.00 figure. A decisive breach of the latter would expose the 50-day Simple Moving Average (SMA) at 17.19, followed by the confluence of the 100 and 200-day SMAs at around 17.38/40.

On the flip side, if sellers drag prices toward last Friday’s low of 16.82, that could open the door for further downside. Once cleared, the next support would be the January 8 low of 16.78, followed by the August 28 cycle low of 16.69, ahead of last year’s low of 16.62.

USD/MXN Price Action – Daily Chart

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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