Mexican Peso weakens in early North American trading as US Dollar gains strength.
Mexican data is mixed though the economy finished 2023 on a higher note.
Central bank divergence between Fed and Banxico could bolster USD/MXN pair.
The Mexican Peso depreciated in early trading during the North American session as the US Dollar climbed some 0.25%, based on the US Dollar Index (DXY). Speculation that the Bank of Mexico (Banxico) would ease policy on Thursday grew, while traders continued to trim odds for the Federal Reserve’s first rate cut. The USD/MXN trades at 16.83, clocking a gain of 0.08%.
Mexico’s economic docket featured the release of Aggregate Demand and Private Spending, with both figures exceeding Q3 2023 readings, suggesting the economy ended the year on a higher note. Across the border, US housing data exceeded estimates and improved compared to January’s data, and now all heads turn toward the Federal Open Market Committee (FOMC) decision on Wednesday.
Daily digest market movers: Mexican Peso on defensive amid dovish Banxico
Estimates that Banxico will lower the interest rate from 11.25% to 11% puts “some” pressure on the Mexican currency, which could lift the USD/MXN toward the 17.00 mark.
Mexico’s economic data released on Tuesday:
Aggregate Demand rose by 0.3% QoQ in Q4, up from 0%. On an annual basis decelerated from 2.7% to 2.6%.
Private Spending on a quarterly basis slowed from 1.2% to 0.9%. On a yearly basis, it improved from 4.3% to 5.1%.
The USD/MXN is being driven by the reduction of interest rate spreads between Mexico and the United States. This could bolster and set the USD/MXN direction toward the 17.00 figure.
On March 21, Banxico is expected to decrease interest rates, even though it could feature a 3-2 vote split. Recent speeches and media appearances show that Banxico’s Governing Council is divided, with Governor Victoria Rodriguez Ceja, Omar Mejia Castelazo and Galia Borja Gomez leaning dovish. On the hawkish front lie Jonathan Heath and Irene Espinosa Cantellano.
An economic slowdown in Mexico is the main event that could spark Banxico’s first rate cut as the central bank has adjusted its economic projections to the downside. Mexico’s central bank expects the economy to grow 2.8% YoY in 2024, down from 3% and maintaining at 1.5% for 2025.
US Building Permits in February rose 1.9% from 1.495 million to 1.518 million, suggesting that demand continues to increase.
Housing Starts increased by 10.7% compared to January’s data as starts jumped from 1.425 million to 1.521 million.
The latest inflation figures in the United States prompted investors to price in a less dovish stance. Money market futures had adjusted their rate cut expectations more in line with the Fed as they foresee the Federal Funds Rate (FFR) at 4.71% toward year end. The next Fed meeting is scheduled for March 19-20 next week, and analysts estimate no change to its Federal Funds Rates (FFR).
Technical analysis: Mexican Peso begins to weaken as USD/MXN aims above 16.80
The USD/MXN has shifted to a neutral bias as buyers stepped in and lifted the exchange rate above the January 8 swing low of 16.78. After breaching that level, the pair clocked a new two-week high of 16.94, though buyers are taking a breather before launching an assault toward 17.00. Once that hurdle is overcome, the next resistance would be the 50-day Simple Moving Average (SMA) at 17.02, followed by the 100-day SMA at 17.16 and the 200-day SMA at 17.21.
On the flip side, the exotic pair must drop below 16.80, which could pave the way for a test of last year’s low of 16.62, followed by October 2015’s low of 16.32 and the 16.00 psychological level.
USD/MXN Price Action – Daily Chart
Banxico FAQs
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%.
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.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : FXStreet – https://www.fxstreet.com/news/mexican-peso-falls-against-strong-us-dollar-as-fomc-meeting-looms-202403191611
