Mexican Peso loses a step against the US Dollar as inflation climbs in Mexico

Mexican Peso reverses its course and registers losses as the USD/MXN hovers near the 100-day Simple Moving Average (SMA).
Mexico’s inflation ticked up in November, which could prevent Banxico from easing policy as soon as they projected.
US labor market data revealed during the week continued to cool down; USD/MXN traders eye US Nonfarm Payrolls.

Mexican Peso (MXN) is dropping sharply against the US Dollar (USD) during Thursday’s New York session. Economic data from Mexico suggests the Bank of Mexico (Banxico) would likely need to keep interest rates higher, not just for “some time,” as the central bank stated in its latest monetary policy statement, which could keep the USD/MXN trading below the 18.00 figure. At the time of writing, the exotic pair changes hands at 17.42 and gains 0.81%.

Mexico’s National Statistics Agency (INEGI) revealed that inflation rose in November, though core readings dipped. The USD/MXN has been underpinned by a rise in US Treasury bond yields. However, the Greenback (USD) remains weak, as shown by the US Dollar Index (DXY), which is down 0.49% on the day at 103.65.

Daily digest market movers: Mexican Peso on the backfoot despite rising inflation in Mexico

Mexico’s Consumer Price Index (CPI) in November rose 4.32% YoY, exceeding September’s 4.26%, though still below the forecast of 4.40%. The Core CPI, usually sought by central banks as a more stable measure of price stability, slowed from 5.5% to 5.30% in the twelve months to November, below forecasts of 5.34%.
In recent interviews, Banxico’s Governor Victoria Rodriguez Ceja and Deputy Governor Jonathan Heath commented that they could ease policy if the disinflation process advances. Contrarily to that, Deputy Governor Irene Espinosa pushed back and said inflationary risks remain and are growing.
In the US, the labor market continues to cool down due to recently released data. The US Challenger Job Cuts revealed that US employers cut 45.51K jobs, exceeding October’s 36.836K.
In the same tenor, Initial Jobless Claims for the week ending December 2 came at 220K, below estimates of 222K but above the prior week’s 219K.
Jobless claims, summed to the latest JOLTs and ADP figures, added to softer inflation readings, led financial markets to conclude the Federal Reserve (Fed) has ended its tightening cycle. Therefore, market participants had already begun to price in more than 100 bps of cuts for 2024
Money market futures projects the US Federal Reserve would slash rates by 135 basis points toward December 2024.

Technical Analysis: Mexican Peso weakens against the US Dollar as the USD/MXN struggles around the 100-day SMA, key resistance level

The USD/MXN edges up and meanders at around the 100-day SMA at 17.38, which, once cleared, could open the door for a move toward the psychological 17.50 figure. If buyers reclaim the latter, the 200-day SMA at 17.55 will be exposed, followed by the 50-day SMA at 17.67.

Conversely, if USD/MXN remains below the 100-day SMA, the downtrend would remain intact, with the first support level seen at the current week’s low of 17.16. Once cleared, the next demand area would be the 17.00/05 range.

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.

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