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17:31:05 29-11-2023

Mexican Peso on the defensive against US Dollar as US GDP exceeds forecasts

  • Mexican Peso advance is capped by the Greenback as the economy in the United States (US) remains solid.
  • The OECD predicts a slowdown in Mexicos economy, largely due to a cooling US economy impacting Mexican exports.
  • Fed Wallers dovish remarks limit the USD/MXN advance, as traders anticipate over 100 bps rate cuts from Fed in 2024.

Mexican Peso (MXN) retreats against the US Dollar (USD) in an early trading session on Wednesday after the US Department of Commerce revealed the economy in the United States (US) is growing above trend, which could warrant further action by the US Federal Reserves (Fed). Consequently, the USD/MXN bounces off its daily lows and trades near the highs of the 17.15/17.20 range, up 0.12% on the day.

Mexicos economic docket remains light. On Thursday, Octobers unemployment rate is expected to be 2.8%, a tick lower than in September. Meanwhile, the Organization for Economic Co-operation and Development (OECD) released the 2024 economic outlook for Mexico, in which the economy is expected to expand at a slower pace of 2.5%, down from a 3.4% growth rate registered in 2023. The report cites the moderation of the US economy, which would likely dampen Mexicos exports. The OECD suggests the Bank of Mexico (Banxico) monetary policy must remain restrictive, as inflation is estimated to dip to 3.9% and 3.2% in 2024 and 2025, respectively.

Across the border, the US economy grew faster than expected, the US Bureau of Economic Analysis (BEA) reported, sponsoring a leg-up in the US Dollar Index (DXY), which tracks the performance of the Greenback versus six currencies. The DXY climbs 0.23%, up at 102.95, a headwind for the USD/MXN.

Daily digest movers: Mexican Peso weakens as the USD/MXN rises to 17.15 following US data

  • The US Gross Domestic Product (GDP) for Q3 rose by 5.2% QoQ, exceeding estimates of 5%.
  • The US Advancement Goods Trade Balance registered a deficit of $89.8 billion in October, widening $3.5 billion from the $86.3 deficit in September.
  • On Tuesday, Fed Governor Christopher Waller, a former hawk, commented that there are good economic arguments that rates could be lowered if inflation continues falling for several months.
  • A day after Fed Waller's comments showed interest rates, traders expect 115 basis points of rate cuts by the US central bank in 2024.
  • On November 27, Banxicos Deputy Governor, Jonathan Heath, commented that core prices must come down more, adding that one or two rate cuts may come next year, but very gradually and with great caution.
  • On November 24, a report revealed the economy in Mexico grew as expected in the third quarter on an annual and quarterly basis, suggesting the Bank of Mexico would likely stick to its hawkish stance, even though it opened the door for some easing.
  • Mexico's annual inflation increased from 4.31% to 4.32%, while core continued to ease from 5.33% to 5.31%, according to data on November 23.
  • The financial markets' narrative that the US Federal Reserve (Fed) is done hiking rates has kept the Greenback on the backfoot, but today, it has found some relief.
  • Data published earlier this month showed prices paid by consumers and producers in the US dipped, increasing investors' speculations that the Feds tightening cycle has ended.
  • A Citibanamex poll suggests that 25 of 32 economists expect Banxico's first rate cut in the first half of 2024.
  • The poll shows a great dispersion for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
  • The same survey revealed that economists foresee headline annual inflation at 4.00% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024

Technical Analysis: Mexican Peso loses strength though the USD/MXN bias remains bearish below the 200-day SMA

Even though the USD/MXN reached a new week high of 17.22, buyers barely cling to minuscule gains. The 20-day Simple Moving Average (SMA) is about to cross below the 100-day SMA, both at around 17.34, signaling the downtrend is gaining steam. If the pair drops below 17.05, the next support would be the 17.00 figure, ahead of challenging the year-to-date (YTD) low of 16.62.

Conversely, if buyers achieve a daily close above the November 21 high at 17.26, that would put into play a test of the confluence of the 20 and 100-day SMAs at 17.34. Further upside is seen at the 200-day SMA at 17.58.

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 countrys central banks 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 Mexicos 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.

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