Mexican Peso recovers ahead of FOMC meeting minutes

Mexican Peso registers losses as USD/MXN trades at 16.68, up more than 0.30%.
Federal Reserve meeting minutes showed that officials could raise rates if inflation warrants it.
The Citibanamex survey shows most analysts expect a Banxico rate cut on June 27.

The Mexican Peso registers losses against the US Dollar on Wednesday during the North American session after the minutes of the last Federal Reserve (Fed) monetary policy meeting were released. That and recent Fed officials’ hawkish commentary kept the Peso down on the week. The USD/MXN trades at 16.68, up 0.31%.

The latest Federal Open Market Committee minutes highlighted, “Various participants mentioned willingness to tighten policy further should risks to outlook materialize and make such action appropriate.” Regarding the tightness of the monetary policy, officials remained uncertain, adding that “it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to 2%.”

During the week, speeches by Federal Reserve officials laid the ground for the “hawkish tilt” of the FOMC’s minutes, as most officials commented they would like to be certain that inflation is edging down and that they’re not in a rush to lower the federal funds rate.

Across the border, the May Citibanamex survey showed that 26 analysts estimate the Bank of Mexico (Banxico) will lower rates at the upcoming meeting on June 27. Eight estimate the Mexican central bank will lower rates until the second half of 2024.

Inflation expectations for 2024 were revised upward from 4.17% to 4.21%, while underlying prices are expected to fall from 4.10% to 4.07%.

Daily digest market movers: Mexican Peso drops on strong US Dollar after Fed minutes

On Tuesday, Mexico’s docket featured the Economic Activity Indicator for April, which revealed that the economy slowed, according to non-seasonally adjusted figures on a yearly basis.
On Thursday, Mexico’s economic docket will feature the announcement of the Gross Domestic Product for Q1 2024 and mid-month inflation data for May. Banxico will also reveal monetary policy minutes from its latest meeting.
Mexico’s Gross Domestic Product for Q1 2024 is expected to show the Mexican economy is slowing amid higher borrowing costs of 11.00% set by Banxico due to fears of higher inflation and the risks of Peso depreciation.
Diverging views surfaced in Banxico. Governor Victoria Rodriguez Ceja said last Monday that the bank would discuss lowering rates in the upcoming meeting on June 29. Conversely, Deputy Governor Espinosa commented that lowering rates in March might have delayed inflation convergence toward the central bank’s target by two quarters.
On Tuesday, Fed officials made some comments. Atlanta Fed President Raphael Bostic said he isn’t in a hurry to reduce rates and prefers to keep them steady. Later, Fed Governor Christopher Waller said that April’s CPI showed progress but that he needs to see several months of good inflation data before supporting a rate cut. His colleague, Vice-Chair of Supervision Michael Barr, commented, “We still need to finish the job on inflation.”
Data from the Chicago Board of Trade shows investors are expecting 31 basis points (bps) of Fed easing toward the end of the year.

Technical analysis: Mexican Peso on the defensive as USD/MXN hovers near 16.70

The USD/MXN remains in a downtrend, though it seems to have bottomed out at around the 16.52/54 area during the week. The exotic pair has broken the 16.60 resistance level. Sellers’ momentum stalled as depicted by the Relative Strength Index (RSI), which stands in bullish territory but flat.

If buyers lift the USD/MXN toward the 50-day Simple Moving Average (SMA) at 16.76, it could exacerbate a rally toward the 100-day SMA at 16.91. Once cleared, the next supply zone would be the 17.00 psychological level. In that event, the next stop would be the 200-day SMA at 17.17.

Conversely, a drop below 16.52 could exacerbate a challenge of the 16.50 psychological level, ahead of the year-to-date low of 16.25.

Economic Indicator

1st half-month Inflation

The 1st half-month core inflation index released by the Bank of Mexico is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of Mexican Peso is dragged down by inflation. The inflation index is a key indicator since it is used by the central bank to set interest rates. Generally speaking, a high reading is seen as positive (or bullish) for the Mexican Peso, while a low reading is seen as negative (or Bearish).

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