Mexican Peso appreciates as the economy in Mexico continues to shine

25 Nov 2023, 00:54 · Views 57

Mexican Peso extends its rally, capitalizing on a weaker USD.
Mexico's GDP growth aligns with expectations and might refrain Banxico's officials from easing monetary policy.
Mixed US economic data, with improving business activity but a downturn in Manufacturing PMI, weighed on the USD/MXN pair.

Mexican Peso (MXN) prolongs its gains against a softer US Dollar (USD) as North American traders get back from Thanksgiving for a shortened session, though they failed to boost the latter. Treasury bond yields in the United States (US) rose while interest rate cuts odds by the US Federal Reserve (Fed) were pushed back. Meanwhile, Mexico’s economy grew as expected, a headwind for the USD/MXN, trading with losses of more than 0.50%.

The National Statistics Agency (INEGI) revealed the Gross Domestic Product (GDP) rose as expected on an annual basis and exceeded forecasts in a 90-day period. That could prevent Bank of Mexico (Banxico) officials from adopting a dovish stance after the minutes showed policymakers estimated a rate cut in the first quarter of 2024.

On the US front, business activity showed signs that it remains improving, according to the S&P Composite and Services PMI. The outlier was Manufacturing, which dropped into recessionary territory.

Daily digest movers: Mexican Peso helped by solid economic growth and a steady disinflation process

Mexico’s GDP growth for Q3 came at 3.3% YoY, as foreseen, exceeding the previous reading. Quarterly basis rose by 1.1%, peaking forecasts and the previous figures of 0.9% and 0.8%, respectively.
The Mexican Consumer Price Index (CPI) for mid-November annually increased by 4.32%, exceeding estimates of 4.31%.
US S&P Global Services and Composite PMIs came at 50.8, exceeding estimates, and at 50.7, above forecasts, unchanged from the previous report.
Manufacturing activity revealed by US S&P Global, witnessed the index dropping from 50 to 49.4, below estimates of 49.8.
Core CPI in Mexico decelerated compared to previous data and slowed to 5.31%, below forecasts of 5.33%.
A Citibanamex poll suggests that 25 of 32 economists polled expect Banxico's first rate cut in the first half of 2024.
The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
The same survey revealed that economists foresee headline annual inflation at 4% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024
Data published last week showed prices paid by consumers and producers in the US dipped, increasing investors' speculations that the Fed’s tightening cycle has ended.
The swap market suggests traders expect 84 basis points of rate cuts by the Fed in 2024.

Technical Analysis: Mexican Peso in the driver’s seat, as USD/MXN threatens to close the week below 17.10

The USD/MXN pair was undermined by upbeat economic data, which pushed the pair below the 17.10 mark, reaching a three-day low of 17.08. The bias remains downward, and the pair could extend its losses if it breaches the November 21 swing low of 17.06. If that level is surrendered, a test of 17.00 is on the cards.

On the other hand, if buyers reclaim 17.20, that could facilitate a jump to the 100-day Simple Moving Average (SMA) at 17.34. Once buyers regain that supply zone, further upside could be witnessed at the 20-day SMA at 17.46.

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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