USD/MXN CONTINUES TO LOSE GROUND ON SUBDUED US DOLLAR, INCHES LOWER TO NEAR 17.00

• USD/MXN extends its losses as the US Dollar remains subdued following downbeat US manufacturing data.
• Fed’s Bostic expects that the rates deduction would likely initiate around the end of 2024.
• Banxico is expected to implement monetary policy easing in March, with 75 bps over the next six months.

USD/MXN extends its losses for the third successive session on Monday, edging lower to near 17.00 during the early European session. The US Dollar (USD) remains in the negative territory following the recent losses registered on Friday. The US Dollar Index (DXY) faced downward pressure primarily due to downbeat manufacturing numbers from the United States (US) recorded in February.

The DXY moves lower to near 103.80 despite the improved US Treasury yields with 2-year and 10-year standing at 4.55% and 4.20%, respectively, by the press time. Furthermore, Atlanta Fed President Raphael W. Bostic has shared his expectation that the interest rates deduction would likely initiate nearing the end of 2024 at the earliest, which suggests no rate cuts anytime soon and, consequently, supports the US Dollar (USD).

As per the CME FedWatch Tool, the rate cut chances in March stood at 5.0%, while the probabilities of cuts in May and June are estimated at 26.8% and 53.8%, respectively. Investors’ focus will be on the speech of Federal Reserve Chair Jerome Powell on Wednesday and Thursday for further insights into the central bank's monetary policy stance, along with the employment data later in the week.

On the other side, the Bank of Mexico’s (Banxico) Fiscal Balance in pesos showed a deficit of 159.14 billion in January, compared to the previous negative balance of 291.23 billion in December 2023. The Mexican Peso (MXN) has gained traction against the US Dollar (USD), buoyed by labor market data released for January last week. The jobless rate rose to 2.9% year-over-year from 2.6% prior, exceeding expectations of a 2.8% rise but maintaining a relatively tight labor market.

Anticipation for Banxico to implement monetary policy easing in March remains significant, with investors forecasting a reduction of 75 basis points over the next six months. Deputy Governors Jonathan Heath and Omar Mejia have voiced support for a measured strategy in adjusting rates, stressing the significance of sustaining higher rates for an extended duration. Furthermore, Deputy Governor Irene Espinosa has highlighted the necessity for Banxico to carefully evaluate both external and internal factors influencing inflation when formulating policy decisions.