Mexican Peso corrects after lower-than-expected inflation data

The Mexican Peso (MXN) is pulling back after the release of cooler-than-expected inflaiton data for March, on Tuesday. Despite this small correction, the Mexican Peso continues trading at eight almost nine-year highs around 16.30 against the US Dollar (USD) after extending its long-term bull trend.

Mexican Peso fades after cooler-than-expected CPI data 

The Mexican Peso fades after Mexican inflation data for March deviates from economists’ expectations.

Mexican Headline Inflation showed a 0.29% MoM rise according to data from the National Institute of Statistics and Geography of Mexico.  This was lower than the 0.36% increase expected and higher than the 0.09% rise noted in February. 

Core Inflation registered a rise of 0.44%, which was more muted than the 0.51% economists had forecast, but below the 0.49% increase in February. 

The Mexican Peso weakened about a tenth of a percentage point against the US Dollar (USD) immediately after the release as it increases the probabilities that the Banco de Mexico (Banxico) will cut interest rates. Lower interest rates tend to reduce demand for a currency as they attract less foreign capital inflows. 

The bank reduced interest rates from 11.25% to 11.00% at its March meeting after seeing a gradual decline in inflation, however, the meeting minutes made it clear that future decisions will be data-dependent, and that the overall outlook for inflation remains elevated. 

Technical Analysis: USD/MXN quickens downtrend

USD/MXN has quickened the pace of its long-term downtrend. The trend started after the pair peaked at 25.76 in April 2020 –  it has now fallen to the 16.20s. Since “the trend is your friend,” it is likely to extend. 

The pair is probably unfolding a large three-wave Measured Move pattern. These are composed of an A, B, and C wave, with wave C extending to a similar length to wave A, or a Fibonacci 0.618 ratio of A. 

USD/MXN Weekly Chart 

If this is the case, price has almost reached the point at which C will equal A, calculated as lying at 15.89. 

It has also by now surpassed the conservative target for the end of C at the 0.618 Fibonacci extension of A (at 18.24). 

Once the pattern is complete the market usually reverses or undergoes a substantial correction. 

The Relative Strength Index (RSI) is converging acutely with price – a sign the downtrend could be losing momentum. USD/MXN has pushed lower than the 2023 lows but RSI has not followed suit. This non-correlation is a bullish indication. It could lead to a correction higher eventually. 

There has been no reaction from price yet, however, so the expectation of upside remains speculatory and unconfirmed.

(This story was corrected on April 9 at 10:39 GMT to say that the Mexican Peso has extended its uptrend to almost nine-year highs not lows).