- Mexican Peso advances in aftermath of US inflation report, US yields declining becomes headwind for Greenback.
- Banxico Governor’s optimistic outlook on inflation trajectory bolsters confidence, targets 3% by 2025.
- Market shrugs off US PPI data, reducing speculation on immediate Federal Reserve rate cuts.
Mexican Peso advanced against the US Dollar on Wednesday as US Treasury bond yields dropped, following the latest inflation report from the United States (US). That, along with an upbeat market mood, is a headwind for the USD/MXN pair, which trades below the 17.20 figure, aiming to regain the 50-day Simple Moving Average (SMA).
Mexico’s economic calendar is empty throughout the week with the exception of the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja’s interview earlier on Monday. She said inflation is expected to resume its downtrend and added that inflation would hit Banxico’s 3% target by 2025.
In the US the release of the Producer Price Index (PPI) was ignored by market participants, which had already dialed back odds for Fed rate cuts.
Daily digest market movers: Mexican Peso regains control amid soft US Dollar demand
- The US Bureau of Labor Statistics revealed December’s PPI, which came below the previous reading of -0.1% at -0.2%. In monthly data, the core PPI stood at -0.1%, suggesting that inflation is cooling down.
- The US Consumer Price Index (CPI) was lower than the previous month, though it exceeded estimates. Excluding volatile items, the so-called core CPI was unchanged, shy of the 4% threshold.
- Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they trimmed odds for March and May.
- US 10-year Treasury note yields erase some of yesterday’s gains and are down six basis points to 4.273%, while the US Dollar Index (DXY) dropped toward 104.71, down -0.13%.
- Mexico’s central bank revised their inflation expectations to the upside for the period from Q1 to Q3 of 2024, expecting inflation to converge toward 3.5% in Q4, based on the latest monetary policy statement.
- Chicago Fed President Austan Goolsbee said, “It is totally clear that inflation is coming down,” even though the latest inflation report was high.
- Atlanta Fed President Raphael Bostic said the Fed must be resolute and added that he’s “laser-focused” on inflation. At the same time, Dallas Fed President Lorie Logan noted that there’s no urgency on cutting rates.
Technical analysis: Mexican Peso climbs as USD/MXN edges back above 17.15
The USD/MXN remains neutrally-biased, but short-term momentum favors sellers. The exotic pair tumbled below the 50-day Simple Moving Average (SMA) at 17.11. The Relative Strength Index (RSI) points downward, having crossed the 50-midline, which could open the door for additional downside. A daily close below that level could pave the way for further losses. The next support would be the 17.00 figure, followed by last year’s low of 16.62.
On the flip side, if buyers reclaim the 50-day SMA, that could pave the way for further upside, with the next resistance seen at the 200-day SMA at 17.29. Once cleared, the next resistance would be the 100-day SMA at 17.40.
USD/MXN Price Action – Daily Chart
Banxico FAQs
What is the Bank of Mexico?
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
How does the Bank of Mexico’s monetary policy influence the Mexican Peso?
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
How often does the Bank of Mexico meet during the year?
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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