Mexican Peso sees marginal losses despite soft US PPI data

16 Nov 2023, 00:08 · Views 69

Mexican Peso records slight losses against the US Dollar, influenced by US inflation data and the rise in US Treasury yields.
Banxico maintains a less hawkish stance on interest rates, with potential rate cuts hinted for the next year, capping the Peso’s advancement.
Banxico's Deputy Governor Jonathan Heath reiterated they could cut rates next year, though the stance would remain restrictive.

Mexican Peso (MXN) registers minimal losses against the US Dollar (USD) in early morning trading on Wednesday, following Tuesday's 1.51% gains, due to soft inflation data in the United States (US). Even though a risk-on impulse usually benefits risk-perceived currencies like the Peso, a jump in US Treasury bond yields capped the USD/MXN fall, which exchanges hands at 17.35, virtually unchanged on the day.

At the latest Bank of Mexico (Banxico) monetary policy decision on November 9, the Government Board held rates unchanged and sounded less hawkish, saying that rates need to be at the current level for “some time.” On Monday, Governor Victoria Rodriguez Ceja said that rate cuts could be in play next year; words echoed by Deputy Governor Jonathan Heath on Tuesday. He said that the monetary policy will remain restrictive despite cutting interest rates.

On the data front, Mexico’s calendar is empty. In the US, data showed prices paid by producers declined, while retail sales shrank in October, but previous figures were upward revised, suggesting consumers' resilience despite the Fed's restrictive stance.

Daily digest movers: Mexican Peso trims some of its Tuesday’s gains, as Banxico adopts a neutral stance

The US Producer Price Index (PPI) rose 1.3% in the year to October, below estimates of 1.9% and monthly deflated 0.5%, beneath forecasts of a 0.1% expansion.
Retail Sales fell 0.1% MoM, less than the 0.3% contraction expected. Sales in the 12-month period rose by 2.5%, below September’s 4.1% increase.
Banxico’s Deputy Governor Jonathan Heath added the Government Board continues to monitor real rates, which currently lie at around 7%.
Heath said Banxico wouldn’t rely on other countries – usually, Banxico reacts to the US Federal Reserve’s decisions – and said they would depend on incoming data and how inflation expectations evolve.
On Monday, Banxico’s Governor Victoria Rodriguez Ceja commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
Mexico’s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso almost flat, with USD/MXN hovering around the 100-day SMA

The USD/MXN pair bias has shifted to neutral downwards in the short term, and the pair is on the brink of breaking crucial support levels like the 100-day Simple Moving Average (SMA) at 17.34, followed by the psychological 17.00 figure. The pair could shift bearishly as the 20-day SMA accelerates and breaks below an area comprised of the 50 and 200-day SMAs at around 17.70-17.65. If the bearish cross completes, it would shift the broader trend downwards and open the door to challenging the year-to-date (YTD) low of 16.62, printed in July.

On the other hand, if buyers keep the USD/MXN pair above 17.33 and reclaim 17.50 in the near term, they could remain hopeful of testing key resistance levels, like the 200-day SMA at 17.65, ahead of the 50-day SMA at 17.70. Once cleared, the next resistance emerges at the 20-day SMA at 17.87 before buyers could lift the spot price towards the 18.00 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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