Mexican Peso weakens on strong US Retail Sales, high US yields

Mexican Peso falls against strengthening US Dollar, driven by unexpectedly robust US Retail Sales for March.
Mexico’s absence of significant data leaves USD/MXN pair more responsive to US economic data, risk appetite.
Forecasts for US economic growth look promising, Atlanta GDP Now predicting 2.4% growth rate in Q1 2024.

The Mexican Peso (MXN) depreciates against the US Dollar on Monday, courtesy of strong economic data from the United States (US) and higher US Treasury yields. Retail Sales in March were solid, keeping the Greenback bid and poised to test the highs of November 2023, according to the US Dollar Index (DXY). At the time of writing, the USD/MXN trades at 16.68, a gain of 0.23%.

With Mexico’s economic calendar relatively light, the focus for USD/MXN traders shifts to US Dollar dynamics and overall market sentiment. The next significant data release for Mexico, the Retail Sales data, is scheduled for April 19, 2024.

March’s Retail Sales in the US smashed estimates, an indication that Americans continued to spend despite higher interest rates set by the US Federal Reserve (Fed). It should be noted that sales in the control group – used to calculate the Gross Domestic Product (GDP) – skyrocketed sharply, which could be a prelude to strong growth in the first quarter of 2024.

Atlanta GDP Now estimates the US economy will grow 2.4% in Q1 2024, according to its latest update on April 10, 2024. The model will be updated later on Monday.

Daily digest market movers: Mexican Peso hurt by strong US Retail Sales

March’s US Retail Sales increased by 0.7% MoM, exceeding estimates of 0.4%. This shows an increase of 2.1% in Q1 2024 compared to last year’s first quarter, an indication of consumer strength.
Retail Sales in the control group jumped from 0.3% in February to 1.1% MoM in March, crushing forecasts of a 0.4% expansion.
Geopolitical tensions in the Middle East would likely weigh on the Mexican currency.  USD/MXN traders must be aware that any escalation could prompt traders to ditch the Mexican Peso and buy US Dollars.
Following the data release in the US, Treasury yields surged more than 10 basis points (bps) in the belly and long end of the yield curve. That underpins the Greenback, which, according to the DXY, is up a modest 0.09% at 106.17.
New York Fed President John Williams said that his baseline scenario projects rate cuts “will likely start this year.” He thinks the policy is restrictive, adding that strong fundamentals are driving consumer spending.
Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 4.975%.

Technical analysis: Mexican Peso consolidates as USD/MXN hovers around 16.62

The USD/MXN daily chart portrays the pair as neutrally biased, after achieving a daily close near the 2023 low of 16.62. Despite that, downside risks remain as the latest cycle high  at 16.94 reared its head on March 19. Once it’s cleared, the exotic pair would shift to neutral-bullish.

On the upside, the first resistance would be the April 12 high at 16.74. A breach of that level would expose the 50-day Simple Moving Average (SMA) at 16.78, followed by the 100-day SMA at 16.97, before testing 17.00. On the other hand, if USD/MXN slides below 16.62, look for a test of the April 12 low of 16.40.

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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