Mexican Peso rebounds amid prospects of Fed rate cut
- Mexican Peso appreciates 0.50% against the Dollar following a week of mixed US data, bolstering Fed rate cut odds.
- Light economic docket sees US Import Prices rise slightly, while Export Prices decline in November.
- Upcoming decisions by the Fed and Banxico next week could further influence USD/MXN.
The Mexican Peso recovered after registering losses on Thursday and appreciated some 0.50% against the Greenback during the North American session. Mixed economic data from the US released in the week augmented bets that the Federal Reserve ( Fed) will cut interest rates next week. The USD/MXN trades at 20.11, down after hitting a high of 20.26.
The economic docket in Mexico and the US is light on Friday. US Import and Export Prices were featured, with the former posting a minimal rise while the latter fell in November.
During the week, Mexico’s economic data revealed that inflation dipped below estimates in headline and underlying prices in November. This cemented the case for another rate cut by the Bank of Mexico (Banxico), which will host its last meeting on December 19.
Additional data showed that Consumer Confidence in November deteriorated, sliding from 49.5 to 47.7. Industrial Production for the same period, reported on December 12, highlighted the ongoing economic slowdown, printing negative figures in monthly and annual data.
Despite this, the USD/MXN extended its losses, even though the US Dollar Index (DXY) tracks the buck's performance against six currencies, registered daily gains for six consecutive days, and clings to 107.00.
The Peso has been pressured by harsh rhetoric by US President-elect Donald Trump, who threatened to impose 25% tariffs on Mexican imports if the government doesn’t help with illegal immigration and fight the drug cartels.
Nevertheless, the USD/MXN continued to drop, favoring the Mexican currency, as the interest rate differential was maintained.
Next week, the Fed and Banxico are expected to lower borrowing costs. Barring any surprises, the USD/MXN could extend its downtrend toward 20.00 ahead of the year’s end.
Daily digest market movers: Mexican Peso boosted by Fed’s rate cut speculation
- US Import Prices in November edged up by 0.1% MoM, matching October's reading and surpassing expectations of a -0.2% decline.
- Export Prices for November remained flat at 0% MoM, down from 1% in October but beating forecasts of a -0.2% drop.
- Banxico is expected to lower its primary reference rate from 10.25% to 10.00% (25 basis points) at the December 19 meeting, according to the swaps market.
- Banxico’s Governor, Victoria Rodriguez Ceja, remains dovish. In her last interview with Reuters, she said that given the progress of disinflation, the central bank could continue lowering borrowing costs.
- Analysts at JPMorgan hinted that Banxico could lower rates by 50 basis points as inflation data shows that prices are edging lower faster than expected.
- Traders' focus shifted to the Fed’s monetary policy meeting on December 17-18, with traders predicting a 93% chance of a 25 bps rate cut via data from the Chicago Board of Trade.
- Following the decision, investors will eye Fed Chair Jerome Powell's press conference, looking for clues regarding the policy path for 2025.
USD/MXN technical outlook: Mexican Peso recovers as USD/MXN drops toward 20.10
The USD/MXN would finish the week consolidated at around the 20.00-20.25 area for five straight days, unable to clear the top or the bottom of the range, with buyers and sellers finding acceptance within that area.
However, momentum shifted slightly bearishly, as portrayed by the Relative Strength Index (RSI). The USD/MXN is tilted to the downside in the near term.
The USD/MXN's first support would be the 50-day Simple Moving Average (SMA) at 20.07, which has remained almost flat since December 6. Should the pair drop below, it could test 20.00, with further declines seen toward the 100-day SMA at 19.70.
On the upside, if USD/MXN climbs past 20.25, immediate resistance would be 20.50. A breach of the latter will expose the December 2 daily high of 20.59, followed by the year-to-date (YTD) peak of 20.82, followed by the 21.00 mark.
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.