Mexican Peso trades sideways despite Mexico’s upbeat data, ahead of Fed’s decision

01 Nov 2023, 00:29 · Views 54

Mexican Peso remains unable to print a daily close below the 18.00 mark.
Mexico's economy shows resilience as Gross Domestic Product expands for an eighth straight quarter.
USD/MXN continues to exchange hands above the crucial 18.00 level, with geopolitical risks and month-end flows impacting the pair.

Mexican Peso (MXN) trades almost sideways against the US Dollar (USD) early morning during Tuesday’s North American session amid month-end flows and despite good economic data from Mexico. In addition, geopolitical risks remain as Israel disregards a cease-fire in Gaza, deteriorating investors' sentiment. Consequently, the USD/MXN continues to exchange hands above the 18.00 figure, seen as a crucial level for buyers and sellers, as they brace for the US Federal Reserve (Fed) monetary policy meeting.

Mexico’s National Statistics Agency (INEGI) revealed the country grew more than expected in the quarter and annually, extending its trend to eight consecutive quarters, posting solid growth and portraying a resilient economy. The annual growth rate slowed down compared to the previous quarter's reading. Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said a “slowdown is on the cards,” adding that restrictive monetary policy takes a heavier toll, and weaker growth in the US weighs on Mexico’s external sector.

Meanwhile, the office of the finance minister in Mexico expressed that it’s too soon to assess the overall economic impact of Hurricane Otis.

In the meantime, Israel continues its ground offensive in Gaza. In addition to Middle East conflict, the Fed begins its two-day monetary policy meeting, in which officials are expected to keep rates unchanged at the 5.25% - 5.50% range, justifying that long-term bond yields remain higher. Besides that, traders would be looking for clues as Fed Chairman Jerome Powell would take the stand.

Daily digest movers: Mexican Peso hovers around 18.00, despite solid economic growth, awaits Fed's decision

Mexico’s Gross Domestic Product grew by 0.9% QoQ in the third quarter on its preliminary reading, above the previous quarter and estimates of 0.8%.
On a yearly basis, Mexico’s GDP for Q3 expanded 3.3%, above forecasts of 3.2%, but trailed the previous 3.6%.
First estimates of Hurricane Otis damages stand at around $10 to 15 billion dollars, according to Enki Research, a firm specializing in natural disasters.
Mexican authorities reported that around 270,000 houses in Acapulco were affected or destroyed, while 80% of hotels were severely damaged.
The latest release of US economic data shows the economy remains resilient due to strong jobs market, as well as the preliminary release of Q3 GDP figures. USD/MXN traders should be aware of further economic data that could underpin or weigh on the Greenback.
The US Dollar Index, which tracks the performance of the Greenback against six currencies, slides 0.40%, down at 106.15.
Mexico’s economic docket will feature the release of , S&P Global Manufacturing PMIs, Foreign Exchange Reserves, and Gross Fixed Investment.
The US agenda will feature the Fed’s decision, Fed Powell’s press conference, Nonfarm Payrolls employment data, and S&P Global and ISM Manufacturing PMIs.
On October 24, Mexico's National Statistics Agency INEGI reported annual headline inflation hit 4.27%, down from 4.45% at the end of September, below forecasts of 4.38%.
Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%). Next decision will be announced on November 9.

Technical Analysis: Mexican Peso buyers target the 200-day Simple Moving Average

The USD/MXN uptrend remains intact despite Friday’s dip below the 18.00 figure, which puts the 20-day Simple Moving Average (SMA) at 18.10 at risk of being decisively broken to the downside. A daily close below the latter would keep sellers hopeful of driving price action towards the 200-day SMA at 17.72. A breach of the last and the subsequent support would be the 50-day SMA at 17.58. On the flip side, if the exotic pair remains above the 20-day SMA, the next resistance will emerge at the October 26 high at 18.42 before challenging last week’s high at 18.46, ahead of the 18.50 figure.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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.

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