- The Mexican Peso’s momentum weakens as the USD/MXN pair recovers from previous declines.
- Banxico’s decision to lower interest rates to 11.00% presents a complex perspective, which adds to the Peso’s ability to withstand challenges.
- Mexico experienced a decline in its economic performance during January, accompanied by significant inflationary pressures.
- Banxico emphasizes a data-reliant strategy, with the goal of achieving a 3% inflation target by the second quarter of 2025.
The Mexican Peso (MXN) weakened towards the end of the week against the US Dollar (USD) following the decisions of both central banks, the Federal Reserve (Fed) and the Bank of Mexico (Banxico), to maintain and reduce interest rates in response to their respective disinflationary trends.
The currency of the emerging market started to display indications of fragility despite the fact that the vote split by Banxico offered a more equitable atmosphere at the Governing Council. The exchange rate for USD/MXN is currently 16.76, showing a slight increase of 0.15%.
The latest economic data from Mexico showed a contraction in the economy for January compared to December. Additionally, the mid-month inflation report exceeded expectations both monthly and in the 12 months leading up to March.
On another note, Banxico’s decrease in interest rates did not impact the USD/MXN exchange rate despite the narrowing of the interest rate gap between the Mexican Central Bank and the Fed.
The Banxico Governing Council decided to lower the primary reference rate to 11.00%. However, they made it clear that data will influence future monetary policy meetings.
The Bank of Mexico has stated that its policy stance remains restrictive and that it anticipates the continuation of the disinflation process. Furthermore, it expects to achieve its target inflation rate of 3% by the second quarter of 2025.
Despite a Decrease in the Rate Disparity, the Mexican Peso Continues to Gain
- The inflation rate in Mexico surpassed the projected 4.45% and instead rose by 4.48%. Similarly, the core figures exceeded the consensus of 4.62% year on year and increased by 4.69%, as reported by the National Statistics Agency (INEGI) on Friday. In addition, there was a significant decline in Economic Activity of -0.6% on a monthly basis, which fell short of the expected 0.3% growth. Furthermore, this slowdown was even more pronounced compared to December, coming in below the projected 2.6% at a rate of 2%.
- The situation in Mexico indicates that the economy is experiencing a lack of growth. The rate cut by Banxico was justified due to a weak retail sales report, a significant decline in private spending, and a contraction in economic activity. However, they encounter persistently more challenging inflation, which keeps policymakers on high alert.
- In January, retail sales in Mexico experienced a slight decline of 0.6% compared to the previous month. Although this was lower than the expected 0.4% growth, it was an improvement compared to the data from December. The yearly figures took a nosedive, dropping from -0.2% to -0.8%, far below the projected 1.2% growth.
- Aggregate Demand increased by 0.3% quarter over quarter in the fourth quarter, a significant improvement from the previous stagnant growth. Yearly, it slowed down from 2.7% to 2.6%.
- Private expenditure on a quarterly basis decelerated from 1.2% to 0.9%. Annually, there was an increase from 4.3% to 5.1%.
- Traders are analyzing the most recent monetary policy decision made by the Federal Reserve, where they decided to keep rates unchanged and stick to their forecasts of three 25 bps rate cuts by the end of the year. Although the Federal Reserve increased the level of the federal funds rate (FFR) to 3.9%, their decision was seen as accommodating.
- Following the Fed’s announcement, money market traders are indicating a high likelihood of a 25 basis point rate cut by the Federal Reserve, with a probability of 73.2%.
The Mexican Peso Remains Unchanged as the USD/MXN Exchange Rate Surges to 16.80.
Based on the daily chart of USD/MXN, the strength of buyers is diminishing, and there is a possibility that the pair will soon reach the lows observed in 2015. The inability of buyers to surpass the 17.00 level after Banxico’s interest rate reduction indicates that there is more supply than Demand.
In that situation, the first level of support for the unique pair would be the lowest point reached so far this year, which is 16.64. This would be followed by the lowest point reached during the previous cycle in the last year, which is 16.62, and the lowest point reached in October 2015, which is 16.32.
In order to have a positive outlook, traders need to regain the highest point of the current week, which is 16.94, before reaching the 17.00 mark. Next, we have significant levels of resistance to consider, such as the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.11, and the 200-day SMA at 17.20.