Mexican Peso picks up from multi-week lows against US Dollar ahead of Banxico’s decision
- The Mexican Peso trims some losses against the US Dollar with all eyes on Banxico’s decision.
- A “hawkish cut” by the Fed on Wednesday boosted the US Dollar across the board.
- Technically, the USD/MXN is under an increasing bullish momentum above 20.30.
The Mexican Peso (MXN) trades with marginal gains against the US Dollar (USD) on Thursday after dropping to three-week lows near 20.40 the previous day. A hawkish cut by the Federal Reserve (Fed) on Wednesday, combined with uninspiring data from Mexico, keeps the MXN on its back foot ahead of the Bank of Mexico’s (Banxico) monetary policy decision.
A poll of analysts released by Citibank revealed a widespread view that the Mexican central bank would follow the Fed’s steps and cut rates by 25 basis points (bps). The analysts underscore that the lower inflationary pressures and a softer economic outlook put pressure on Banxico to ease borrowing costs.
The Federal Reserve cut interest rates as expected, but its monetary policy statement and Chairman Jerome Powell´s press conference were tilted to the hawkish side. The central bank raised next year’s inflation and growth expectations and signaled a slower easing path.
Monetary policy divergence will likely weigh on the MXN
- The US Dollar Index (DXY) surged to test two-year highs following the Fed´s monetary policy decision, and it is likely to remain firm unless US data contrasts the Fed’s strong economic projections.
- The Bank of Mexico is widely expected to cut rates by 0.25% to 10% later on Thursday. This will be the fifth rate cut this year, with more expected to come in 2025.
- In the US, the Fed cut rates by 25 bps to the 4.25%-4.50% range on Wednesday, but the interest rate projections for 2025 were raised to 3.9% from 3.4%. This means two more rate cuts next year, instead of the four anticipated in September.
- The Fed lifted next year’s inflation expectations to 2.5% from the 2.1% estimated in September, with some analysts anticipating the impact of US President-elect Donald Trump’s inflationary policies.
- US economic growth was revised to 2.5% this year and 2.1% in 2025, from September’s forecasts of a steady 2.0% GDP this year and the next.
- The reaction to the US central bank’s decision boosted risk aversion and sent the US Treasury yields and the US Dollar rallying. The yield for the benchmark 10-year note surged to six-month highs above 4.50%, from 4.13% lows last week.
- In Mexico, Retail Sales dropped unexpectedly by 0.3% in October, against expectations of a 0.2% increase. Retail consumption moderated its yearly decline to 1.2% from 1.5% in the previous month, against expectations of a 1.6% fall.
- According to a survey from Citi, analysts expect Banxico to cut interest rates to 10.00% on Thursday and 150 bps further to 8.5% next year.
- The same survey reveals that market analysts expect the US Dollar to appreciate to 21.00 Mexican Pesos next year, with the Mexican economy slowing down to a 1.6% yearly growth in 2024 and 1.2% in 2025.
Mexican Peso technical outlook: USD/MXN breaks higher, 20.60 resistance comes into focus
USD/MXN has broken above the top of the last two weeks’ horizontal channel at 20.30 and is consolidating gains below the 20.40 area, with the December 2 high at 20.60 on sight.
Technical indicators show increasing bullish momentum, with price action above the 4-hour 100 Simple Moving Average (SMA) and the Relative Strength Index (RSI) still below overbought levels.
Support levels are at the top of the last two weeks’ channel at 20.30, ahead of the key 20.00 level. On the upside, resistances are at the mentioned 20.60, ahead of the November 6 and 26 highs at 20.80.
USD/MXN 4-Hour Chart
Mexican Peso FAQs
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.
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.
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.
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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