Mexican Peso trips down on a firm US Dollar

Mexican Peso starts the session lower as the US Dollar Index (DXY) remains steady around 103.24.
Despite Wall Street gains, USD/MXN fails to rally sharply due to improved risk appetite and lower US Treasury bond yields.
Mexico’s economic docket is eyed by traders, expecting the release of Economic Activity and inflation data.

The Mexican Peso begins the Monday session on a lower note against the US Dollar (USD) due to the Greenback capping its earlier losses as shown by the US Dollar Index (DXY), which is virtually unchanged near 103.24. Alongside that, an improvement in risk appetite and falling US Treasury bond yields have deterred the USD/MXN from gaining ground to higher levels with the pair trading at 17.13, up 0.35%.

Wall Street prints solid gains, which would usually bolster the Mexican currency. Nevertheless, the lack of economic data in Mexico’s docket on Monday and Tuesday leaves traders leaning on data from the United States. Mexico’s calendar will gain traction on Wednesday with the release of the Economic Activity report, along with January’s mid-month inflation data.

In the meantime, Federal Reserve (Fed) officials are absent as they enter their blackout period ahead of the January 30-31 monetary policy meeting.

Daily digest market movers: Mexican Peso on the defensive with traders awaiting further data

In the meantime, former Bank of Mexico (Banxico) Deputy Governor Everardo Elizondo commented that it’s too soon to relax monetary policy in Mexico, adding, “There are enough reasons to remain worried.” Elizondo argued, "If [policy] is loosened, inflationary expectations will deteriorate.”
Mexico’s latest economic data points to the economy slowing down as Retail Sales missed the forecast and trailed October’s data. At the same time, the economy is expected to grow by 2.6%, below forecasts of 3%.
On the US front, last week’s economic data paints a soft-landing outlook. Even though housing data was mixed, American household sentiment improvement and lower inflation expectations underpinned the USD/MXN.
Atlanta GDPNow model suggests last year’s Q4 would likely expand by 2.4%, spurred by strong retail sales, firm industrial production, a tight labor market and consumer sentiment improvement.
Traders trimmed their bets for a dovish Federal Reserve in 2024. They stand at 142 basis points (bps) of cuts from 175 bps last week.
The strongest catalyst last week was Federal Reserve Governor Christopher Waller’s speech: “No reason to move as quickly or cut as rapidly as in the past.” This kept investors in check despite Waller supporting rate cuts if inflation indeed gets lowered.
Mexico witnessed a jump in headline inflation, but core data suggests the Bank of Mexico (Banxico) has done a good job, curbing elevated prices after hiking rates toward 11.25%.
Despite indications from the December meeting minutes of Banxico (the Central Bank of Mexico) that it may consider easing its monetary policy, the inflation report for December poses a potential obstacle to any such policy relaxation.
Standard Chartered analysts estimate the Bank of Mexico (Banxico) will lower rates to 9.25% in 2024.
On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.

Technical analysis: Mexican Peso remains soft as USD/MXN meanders around 50-day SMA

The USD/MXN daily chart shows the pair is strengthening, testing the 50-day Simple Moving Average (SMA) at 17.15, ahead of a key resistance level at the 200-day SMA at 17.36. Further upside is seen once those levels are taken, followed by the 100-day SMA at 17.42 and 17.50. A breach of the latter will expose the May 23 high of 17.99.

On the flip side, if sellers cap the exotic pair from reclaiming the 50-day SMA, that would expose the pair to further losses. The first support would be the January 22 low of 17.05, the figure at 17.00, and the January 12 cycle low seen at 16.82.

USD/MXN Price Action – Daily Chart

Mexican Peso FAQs

What key factors drive the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

How do decisions of the Banxico impact the Mexican Peso?

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.

How does economic data influence the value of the Mexican Peso?

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

How does broader risk sentiment impact the Mexican Peso?

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.