- The Mexican Peso continues to gain strength for the third consecutive day, supported by a robust trade balance and the release of disappointing US PCE figures.
- Mexico’s significant trade surplus and robust job market during December highlight the country’s economic resilience in the face of global uncertainty.
- The decline of the US Fed’s core PCE index, dropping below 3%, has sparked anticipation of a potential rate cut in May. This development has proven advantageous for emerging currencies such as MXN.
The Mexican Peso (MXN) had a strong performance against the US Dollar (USD) on Friday, as data from Mexico indicated that the Trade Balance grew beyond expectations. Meanwhile, inflation data in the United States (US) showed a more moderate increase.
This has maintained the likelihood of a rate reduction by the US Federal Reserve (Fed) at a high level while limiting the strength of the Greenback (USD), which is under pressure due to the expected support for the emerging market currency resulting from the interest rate differential. The USD/MXN is currently trading at 17.16, showing a slight decrease of 0.23% for the day, but managed to end with a gain of 0.53%.
In December, Mexico recorded a surplus, according to the National Statistics Agency (INEGI). The data and robust labor market figures unveiled on Thursday depict the economy’s resilience, supported by the potential of nearshoring.
Meanwhile, the Federal Reserve’s favored measure of inflation, the Personal Consumption Expenditures (PCE) Price Index, remained unchanged. However, the core annualized figure fell below the 3% mark, indicating that the tightness of monetary policy is causing a decline in prices. However, as indicated by the CME FedWatch Tool, investors are firmly convinced that the Federal Reserve will reduce interest rates by 25 basis points in May.
The Mexican Peso Is Continually Making Progress and Reducing Its Weekly Losses
- In December, Mexico’s Trade Balance recorded a surplus of $4.242 billion, surpassing both the previous figure and the predicted amount of $1.4 billion.
- Over the past week, economic data from Mexico showed a combination of positive and negative readings in the mid-month inflation report. The headline figures surpassed expectations, while the core Consumer Price Index (CPI) fell below the 5% mark. This may hinder Banxico from reducing rates in the initial quarter of 2024, despite the fact that two of its members showed interest in December.
- In November, Mexico’s economic activity contracted, with annual figures declining from 4.2% to 2.3%, falling short of expectations.
- The job market in Mexico continues to show resilience, with the Unemployment Rate decreasing from 2.7% to 2.6%.
- The Mexican economy is starting to feel the effects of the elevated interest rates set by Banxico at 11.25%. However, despite this, most analysts predict that the economy will experience growth of over 2% in 2024. Despite falling short of expectations, retail sales, along with the economy expanding at a rate below 3% in November and inflation picking up speed again, indicate the possibility of a stagflationary situation.
- According to a recent Reuters poll, the Mexican Peso may decline 5.4% against the US Dollar, reaching a rate of 18.00 within the next 12 months after December.
- On Friday, the US PCE increased by 2.6% in the 12 months to December, remaining unchanged and meeting expectations. However, the core PCE declined from 3.2% to 2.9%, falling below the predicted levels.
- The most recent data in the United States (US) indicate that the economy continues to be strong and resilient. Its growth rate of 3.3% in Q4 of 2023 exceeded expectations of 2%, and it expanded by 2.5% for the entire year.
- However, conflicting interpretations in additional information indicating that the risks have become more evenly distributed. Investors are anticipating a potential 139 basis point rate cut by the Federal Reserve in 2024, as indicated by data from the Chicago Board of Trade (CBOT).
- The US Department of Commerce has reported that Durable Goods Orders in December showed no change, remaining stagnant at 0%. There has been a significant decline compared to the 5.5% growth observed in November, mainly attributed to a downturn in the manufacturing of transportation equipment.
- The US Bureau of Labor Statistics revealed that Initial Jobless Claims for the week ending January 20 rose to 214K, surpassing both the previous week’s numbers and the expected 200 K.
As the USD/MXN Fell Below 17.15, the Mexican Peso Gained Momentum
The USD/MXN has picked up speed in its downward movement following three consecutive days of losses, yet it remains above a robust support level provided by the 50-day SMA at 17.13. If the latter is violated, it will reveal the January 22 low, then the significant level of 17.00.
Alternatively, should buyers successfully regain control and surpass the upcoming resistance level at the 200-day SMA of 17.34, it may present an opportunity to test the 100-day SMA at 17.41. There is potential for further gains above the significant level of 17.50, with the possibility of reaching the high from May 23 of last year at 17.99.
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