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- The Mexican peso rose to 16.92 after hitting a four-week low of 17.13.
- US GDP data unchanged; Rising unemployment claims indicate an economic slowdown, which weakens the US dollar.
- Banxico is revising inflation expectations upward, hinting at a possible split decision on interest rate cuts in June.
The Mexican peso (MXN) erased some of its earlier losses against the US dollar (USD) and rose about 0.20% after GDP data from the United States showed that the economy is slowing. Mexico’s economic calendar was marked by the release of jobs data, which was as expected and improved Willingness to take risks The decline of the US dollar is a driving force for the Mexican currency. The USD/MXN peso pair is trading at 16.92 after hitting a four-week high of 17.13.
The US Bureau of Economic Analysis (BEA) revealed its second estimate for first-quarter GDP, which was unchanged, in line with the initial reading. At the same time, the US Bureau of Labor Statistics (BLS) revealed that the number of Americans filing for unemployment rose compared to expectations, a sign of weakness.
Following the data, US Treasury yields fell, while… US dollar index (DXY), which measures the dollar’s value against a basket of six currencies, erased Wednesday’s gains, falling 0.41% to 104.68. This boosted the peso, as the emerging market currency fell below the 17.00 level, strengthening sharply.
Mexico’s National Statistics Agency (INEGI) revealed that the labor market continued to slow, according to April jobs data.
The Bank of Mexico (Banxico) on Wednesday unveiled its quarterly report, in which it revised its inflation forecasts upward. Persistent high inflation has divided Banxico’s board of directors.
Banxico expects headline inflation to reach 4% towards the end of 2024, up from 3.5% in its previous report. Base rates are expected to rise from 3.5% to 3.8%.
Banxico Governor Victoria Rodriguez Ceja added that progress has been made in reducing inflation, adding that she “will evaluate inflation expectations as a whole and […] Discuss amendments to the reference price at our upcoming meetings.
Goldman Sachs analysts indicated that the June meeting will be vital. “If the interest rate is cut, it will likely stem from a split decision,” they added.
Meanwhile, traders are preparing for the April PCE release Price index (PCE), the Federal Reserve’s (Fed) preferred measure of inflation. This, coupled with the general elections in Mexico on Sunday, could determine the trajectory of the USD/MXN into the second half of the year as the Mexican currency remains one of the strongest against the US dollar.
Daily summary of market drivers: The Mexican peso is on the offensive after weak US GDP data
- Mexico’s unemployment rate in April came in as expected at 2.6%, up from 2.3% in March.
- The latest economic data from Mexico paint a mixed economic outlook. Although the economy continues to grow, rising prices and a widening trade deficit could cause the value of the Mexican peso to decline.
- This combined with speculation of another rate cut at Banxico in June could pave the way for further upside in the USD/MXN pair.
- A Citibanamex poll conducted in May showed that most economists estimate that Banxico will cut interest rates on June 27 from 11% to 10.75%. The average expects headline inflation to be 4.21% and core inflation to be 4.07% in 2024.
- The US economic calendar showed the second estimate of GDP for the first quarter of 2024, which fell from 3.4% to 1.3% on a quarterly basis, as analysts expected.
- Initial jobless claims for the week ending May 25 rose by 219K, beating expectations of 218K and the previous reading of 216K.
- Despite this, federal funds rate futures estimated 27 basis points of easing at year-end.
Technical Analysis: The Mexican Peso rose as USD/MXN fell below 17.00
The downtrend for USD/MXN remains in place, although buyers gathered strength and pushed the exchange rate towards 17.13, just shy of testing the 200-day simple moving average (SMA) at 17.14. Momentum remains bullish, but buyers are catching their breath after prices rose nearly 3% in three days, weighed down by weak US data.
If buyers reclaim the 17.00 area, it could pave the way for a challenge to the weekly high of 17.13. Once above, the 200-day SMA at 17.14 will be next, before challenging the December 7 high at 17.56, followed by the psychological figure of 18.00.
On the other hand, a bearish continuation may occur if sellers keep the exchange rate below the 100-day simple moving average, which could pave the way for a decline to the 2023 low of 16.62, followed by the May 21 session low of 16.52 and the year. – The lowest level so far at 16.25.
Frequently asked questions about the Mexican Peso
The Mexican Peso (MXN) is the most widely traded currency among its counterparts in Latin America. Its value is widely 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 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 this commodity.
The main goal of the Mexican Central Bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its 3% target, the midpoint of the 2% to 4% tolerance range). To this end, the Bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the economy as a whole. Higher interest rates are generally a positive for the Mexican Peso (MXN) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the Mexican peso.
Macroeconomic data releases are key 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 may encourage the Bank of Mexico (Banxico) to increase interest rates, especially if this force is accompanied by higher inflation. However, if economic data is weak, the value of the Mexican peso is likely to decline.
As an emerging market currency, the Mexican peso tends to do its best work during periods of risk, or when investors view broader market risk as low and are therefore keen to take on higher-risk investments. Conversely, the Mexican peso tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell high-risk assets and flee to more stable safe havens.
