Mexican Peso strengthens in anticipation of Federal Reserve’s decision

Mexican Peso appreciates sharply, over 1% against the US Dollar, reacting to the Fed’s decision.
The Federal Reserve maintains its federal funds rate but plans to reduce its Treasury securities holdings reduction from $60 billion to $25 billion starting in June.
Mexico’s Q1 GDP growth underperforms expectations at 1.6% YoY, although it shows slight improvement quarter-over-quarter.

The Mexican Peso rallied sharply against the US Dollar on Wednesday after the Federal Reserve decided to hold rates, but also opened the door to reducing the Quantitative Tightening program, beginning in June. At the time of writing, the USD/MXN trades at 16.94, down more than 1%.

 The Federal Reserve decided to keep the federal funds rate unchanged at 5.25%-5.50 %. They acknowledged that risks to achieving the Fed’s dual mandate on employment and inflation “moved toward better balance over the past year.” Although they said there’s progress on inflation, recent data showed that it has stalled.

Fed policymakers added that they would begin to reduce holdings on its balance sheet on US Treasury securities from $60 billion to $25 billion starting in June.

Mexico’s economy is slowing, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed on Tuesday. The Gross Domestic Product (GDP) for Q1 2024 grew by 1.6% YoY, missing estimates of 2.1% and trailing 2023’s last quarter at 2.5%. On a quarterly basis, the growth rate showed an improvement from 0.1% to 0.2%, exceeding forecasts for no growth.

Across the border, US Purchasing Managers Index (PMI) figures from S&P Global and the Institute for Supply Management (ISM) were mixed. ADP data exceeded estimates, and job openings showed the labor market is cooling.

Daily digest market movers: Mexican Peso appreciates on mixed US data

Data published in April showed that Mexico’s inflation was mixed. Headline inflation rose, mostly attributed to a jump in Oil prices. Conversely, underlying prices dipped, justifying the Bank of Mexico’s (Banxico) decision to lower rates.
Although most analysts estimate Banxico will keep rates unchanged at 11.00%, new data could prompt heated discussions among Banxico’s Governing Council members on May 9.
Last week, Banxico Governor Victoria Rodriguez Ceja said the central bank would be data dependent. However, weak GDP data could lead to a “live meeting” on May 9.
Citibanamex Survey showed that most analysts expect Banxico to hold rates unchanged at the May meeting. The median foresees a rate cut in June, while they estimate the main reference rate to end the year at 10.00%, up from 9.63% previously.
Measures of business activity in the US were mixed, as S&P Global Manufacturing PMI came at 50.0, higher than expected but trailing March’s 51.9. Contrarily, the ISM Manufacturing PMI came at 49.2, below estimates of 50.0, and signaling contraction in the sector once again after March’s expansion of 50.3
ADP Employment Change rose by 192K in April, exceeding estimates of 175K but below March’s 208K upwardly revised figure. Further jobs data showed the JOLTS Job openings fell in March to their lowest level, from 8.813 million to 8.488 million.
Fed is expected to keep rates unchanged at May 1 meeting, though traders will be eyeing Fed Chair Jerome Powell’s press conference. A hawkish tilt could trigger a jump in favor of the Greenback; otherwise, the USD/MXN could resume its downtrend.
Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.100%, up from 5.080% on Tuesday.

USD/MXN technical analysis: Mexican Peso regains control, USD/MXN dives below 200-day SMA

The Mexican Peso trims some of its Tuesday’s losses, as the USD/MXN struggled to crack the 200-day Simple Moving Average (SMA) at 17.17, turning lower toward the 17.00 figure. If sellers push the price below that level, immediate support emerges at the 100-day SMA at 16.94, followed by the 50-day SMA at 16.81 before challenging last year’s low of 16.62.

Conversely, if buyers regain the 200-day SMA, it will pave the way to test the weekly high of 17.24, followed by the January 23 swing high of 17.38, and the year-to-date (YTD) high of 17.92, ahead of 18.00.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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