Mexican Peso on the defensive as USD/MXN tests key resistance level
- Mexican Peso faces pressure amid economic contraction concerns; falling US yields limit USD/MXN upside.
- INEGI’s report shows Mexico’s economy shrinking by 0.7% MoM, with a modest annual growth of 1.3%.
- US Treasury yield decline offers limited support to US Dollar as Conference Board’s LEI dispels recession fears.
The Mexican Peso (MXN) lost traction against the US Dollar (USD) on Tuesday as traders from the United States (US) returned from the Presidents’ Day holiday. Monday’s data from Mexico suggests the economy most likely contracted in the first month of 2024, while a fall in US Treasury bond yields caps the USD/MXN upside. The pair exchanges hands at 17.06, up by 0.16%.
A report from Mexico’s National Statistics Agency (INEGI) on Monday released the Indicator of Economic Activity (IOAE), which revealed the economy contracted -0.7% MoM, even though yearly figures grew by 1.3%. While data could have triggered weakness in the Mexican Peso, the US holiday capped the emerging market (EM) currency’s fall.
Across the border, US Treasury bond yields dropped, keeping the US Dollar pressured against most currencies, except EMs. In the meantime, the Conference Board (CB) revealed its Leading Economic Index (LEI), which no longer signals an upcoming recession in the US.
Daily digest market movers: Mexican Peso trips down as traders digest Monday’s data
- Mexico´s failure to resolve the steel and aluminum conflict with the US could weigh on the Mexican currency as US trade representative Katherine Tai warned Mexico that the US could reimpose tariffs on imports of the aforementioned commodities if the Mexican government doesn’t stop the increase in exports. US authorities question Mexico’s lack of transparency on imports of steel and aluminum from third countries.
- Mexico’s economic schedule will gather pace on Wednesday with the release of Retail Sales, Gross Domestic Product (GDP) and February’s Mid-Month inflation data.
- Mexico’s Retail Sales are expected to rise 0.2% MoM in December and 2.5% YoY.
- GDP is projected to have grown 0.1% in Q4 2023 and 2.4% YoY.
- Mid-month underlying inflation for February is foreseen cooling from 4.78% to 4.67 YoY, while headline inflation is projected to drop from 4.9% to 4.7%.
- On Wednesday, the US Federal Reserve (Fed) releases the latest Federal Open Market Committee (FOMC) Minutes alongside Fed officials crossing the wires.
- Traders will get further cues from US S&P Global PMIs, Initial Jobless Claims data and the Chicago Fed National Activity Index. The latter is usually a prelude to the Institute for Supply Management’s (ISM) Manufacturing PMI.
- US economic data related to price pressure should greatly influence Federal Reserve officials. Although opening the door to easing policy, Fed officials have expressed numerous times that they will not rush rate cuts.
- Fed’s Bostic said patience is required, and he foresees two rate cuts, which could begin in the summer if the data justifies it. Fed’s Daly said, “We will need to resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
- Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they have trimmed odds for March and May.
Technical analysis: Mexican Peso prints minimal losses as USD/MXN breaks above 17.05
On Monday, I wrote, “The USD/MXN seesaws near the 17.05 mark, below the 50-day Simple Moving Average (SMA) at 17.09.” At the time of writing, the pair remains within the aforementioned level, though the Relative Strength Index (RSI) has begun to edge higher at the risk of shifting bullish. That and the USD/MXN clearing the 50-day SMA could open the door to test the 200-day SMA at 17.28. Further upside lies at the 100-day SMA at 17.38, before the pair rallies toward 17.50.
Conversely, sellers must drag the exchange rate below the 17.00 figure if they would like to remain hopeful of challenging last year’s low of 16.62.
USD/MXN Price Action – Daily Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.