- The Mexican Peso has experienced a decline in value despite the fact that the inflation data in Mexico was a combination of different outcomes.
- The inflation in Mexico surpassed expectations, potentially discouraging Banxico from implementing any policy easing measures in the first quarter of 2024.
- The USD/MXN surged towards the 16.90 region as a result of the overall robustness of the US Dollar.
The Mexican Peso (MXN) is losing momentum against the US Dollar (USD) on Tuesday as the Greenback strengthens. The inflation rate in Mexico for December exceeded expectations, which could potentially discourage the Bank of Mexico (Banxico) from implementing policy measures to stimulate the economy, as two of its policy members indicated last month. Currently, the USD/MXN exchange rate stands at 16.97, showing a 0.88% increase.
The National Statistics Agency of Mexico (INEGI) has reported that consumer prices experienced a higher-than-expected increase in headline inflation. In contrast, core inflation has reached its lowest point since October 2021. The information initially supported the Mexican currency, as the USD/MXN decreased to 16.78. Purchasers entered the scene and elevated the currency conversion rate.
On the other side of the border, officials from the Federal Reserve (Fed) expressed their ongoing support for the current interest rates. Atlanta Fed President Raphael Bostic and Fed Governor Michelle Bowman echoed this sentiment. According to the US Department of Commerce, there was an improvement in small business sentiment in the US, and the Balance of Trade showed a smaller deficit in November.
Strong US Dollars Put the Mexican Peso in a Precarious Position
- In December, Mexico experienced a year-on-year increase in the Consumer Price Index (CPI) of 4.66%, which surpassed the predicted rate of 4.55%. This figure also surpassed November’s CPI of 4.32%. The core figures were reported at 5.09%, which is lower than both the consensus and the previous month’s figures of 5.15% and 5.30%, respectively.
- The Federal Reserve officials have indicated that they believe it is appropriate to maintain interest rates at their current levels. Bostic stressed the importance of preserving a stringent policy, while Bowman expressed confidence in the current level of policy restriction.
- In November, the US Trade Balance deficit showed a more significant improvement than anticipated, decreasing from the estimated $-65 billion to $-63.2 billion. This figure is also lower than October’s deficit of $-64.5 billion.
- The yield on the US 10-year Treasury bond is increasing.
- The level of trust among consumers in Mexico declined in December due to ongoing worries about the country’s economic prospects.
- The economic outlook of the US remains uncertain as recent data on US jobs showed a combination of positive and negative indicators, with business activity in manufacturing showing contraction and the service sector experiencing a decline. While a gentle landing scenario is on the horizon, there is a higher likelihood of a slight economic downturn, so it is advisable to proceed with caution.
- Despite the indications from the latest Banxico meeting minutes that the central bank may contemplate loosening policy, the December inflation report could hinder any potential relaxation of policy.
- On the previous Tuesday, Mexico’s S&P Global Manufacturing PMI for December reached a high of 52.0, which is slightly lower than November’s 52.5. This indicates a potential slowdown in the economy as Banxico continues its tightening cycle.
- Business Confidence in Mexico saw a slight improvement on Wednesday, rising to 54.6 from 54.0 in November. However, this positive development did not have a significant impact on the Mexican Peso, as it continued to display weakness throughout the session.
As the USD/MXN Exchange Rate Continues to Increase and Approaches 17.00, the Mexican Peso Continues to Decline
Despite the USD/MXN resuming its downtrend, the recent increase toward the 16.90 area might indicate a potential upward correction beyond the 17.00 figure. A violation of the latter might worsen a challenge of the 17.20 level, followed by the 50-day Simple Moving Average (SMA) at 17.26.
If sellers manage to prevent the exotic pair from breaking through the 17.00 level, there is a possibility of testing the low from last year. However, sellers will need to get past the resistance at the 16.80 level, then the previous swing low from August 28 at 16.69, and finally the 2023 low at 16.62.