.jpg)
- The Mexican peso is rising sharply as the USD/MXN pair falls more than 2%.
- Mexico’s economy is showing mixed signals, with second-quarter GDP growing 2.1% year-on-year but economic activity contracting, while the Bank of Mexico debates the appropriateness of recent interest rate cuts.
- Powell’s Jackson Hole speech signals rate cuts ahead.
The Mexican peso rose sharply against the US dollar on Friday after Federal Reserve Federal Reserve Chairman Jerome Powell has announced that the central bank is ready to start its monetary easing cycle. This has undermined the US dollar, which is falling to a new yearly low, according to US Dollar Index (DXY). Consequently, the USD/MXN pair collapses by more than 2% and is trading at 19.06 after retreating from its daily peak at 19.53.
The USD/MXN pair extended losses after Powell’s comments, saying: “It is time to adjust policy.”
He added that the Fed is data-driven regarding the size and timing of easing, adding that he is confident that inflation will reach the Fed’s 2% target. Regarding achieving the maximum employment mission, he said that the risks are tilted to the upside.
Following Powell’s speech, traders were pricing in a 33% chance of a 50 basis point rate cut by the Fed at its September meeting. Meanwhile, December 2024 federal funds rate futures show market players are pricing in a 100 basis point rate cut in 2024.
Meanwhile, Mexico’s economic record remained absent on Friday. However, Thursday’s data showed that the country grew by 2.1% year-on-year in the final reading of GDP for the second quarter of 2024. Regarding economic activity, which the National Institute of Statistics, Geography and Informatics (INEGI) uses as a measure of growth, the economy contracted by -0.6%, which is contrary to estimates and May data, which were 0.9% and 1.6%, respectively.
On Thursday, the Bank of Mexico released the minutes of its latest meeting, in which the central bank cut interest rates to 10.75%. The minutes revealed that while “inflation expectations continue to call for a tight monetary policy,” “significant progress” in dealing with inflation suggests it is appropriate to “reduce the level of monetary tightening.”
Bank of Mexico deputy governors Jonathan Heath and Irene Espinosa, who voted against the rate cut, expressed concerns that jeopardizing the credibility of the central bank could be harmful.
Daily Market Movers: Mexican Peso Rises on Powell’s Dovishness
- Mexico’s inflation rate fell to 5.16% in mid-month in August from 5.61%, below economists’ estimates of 5.31%. Core inflation fell below the 4% threshold, from 4.02% to 3.98% year-on-year, below expectations of a 4.06% increase.
- Against the background of a slowing economy in Mexico and lower inflation targeting, this could open the door to further easing by the Bank of Mexico despite the divided decision we saw in August.
- Reuters quoted sources as saying that Mexico’s data and the US Federal Reserve’s start of its monetary easing cycle increase the chances that the Mexican central bank will cut interest rates again in September.
- If the Fed cuts interest rates significantly, it could boost the Mexican peso’s prospects, and the USD/MXN pair could drop below the psychological level of 19.00.
- After Powell’s speech, other Fed officials echoed the sentiment. Patrick Harker of the Philadelphia Fed said the Fed needs to cut rates systematically. Austin Goolsbee of the Chicago Fed added that policy is at its most restrictive level and the Fed’s focus is shifting toward achieving the jobs mandate.
Technical Outlook: Mexican Peso Gains as Traders Push USD/MXN to 19.00
USD/MXN remains bullish, but a double top formation is looming. Momentum is turning bearish, but the RSI remains in bullish territory.
If USD/MXN drops below the 19.00 level, this could exacerbate the decline towards the August 19 low at 18.59 amid further weakness, the pair could test the 50-day simple moving average (SMA) at 18.45, followed by the psychological level of 18.00.
On the other hand, if buyers hold USD/MXN above 19.00, it could pave the way for price consolidation. If the pair breaks above 19.40, expect a move towards 20.00 before testing the YTD high (so far) at 20.22.
Frequently Asked Questions About Mexican Peso
The Mexican peso (MXN) is the most traded currency among its Latin American counterparts. Its value is largely determined by the performance of the Mexican economy, the policy of the country’s central bank, the amount of foreign investment in the country, and even the levels of remittances sent by Mexicans living abroad, especially in the United States. Geopolitical trends can also move the Mexican peso: for example, offshoring—or the decision by some companies to move manufacturing capacity and supply chains closer to their home countries—is also seen as a catalyst for the Mexican currency as the country is a major manufacturing hub in the Americas. Another catalyst for the Mexican peso is oil prices as Mexico is a major exporter of the commodity.
The main objective of the Mexican Central Bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its 3% target, which is the midpoint of a tolerance range between 2% and 4%). To achieve this, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, which makes it more expensive for households and businesses to borrow money, thus cooling demand and the economy as a whole. Higher interest rates are generally positive for the Mexican peso (MXN) because they lead to higher yields, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the Mexican peso.
Macroeconomic data is crucial to assessing the state of the economy and can have an impact on the valuation of the Mexican Peso (MXN). A strong Mexican economy, based on high economic growth, low unemployment and high confidence, is good for the Mexican peso. Not only does it attract more foreign investment, it can encourage the Bank of Mexico (Banxico) to raise interest rates, especially if this strength is coupled with high inflation. However, if economic data is weak, the Mexican peso is likely to fall in value.
As an emerging market currency, the Mexican peso tends to perform strongly during periods of risk, or when investors perceive that broader market risk is low and are therefore keen to participate in riskier investments. Conversely, the Mexican peso tends to weaken during times of market turmoil or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.
