Home Forex Mexican peso rises and breaks key level as bull's eye 2023 high

Mexican peso rises and breaks key level as bull's eye 2023 high

by SuperiorInvest
  • Mexican peso benefits from US dollar weakness and shrugs off Banxico rate cut.
  • Governor Banxico stressed a cautious approach to rate adjustments and highlighted the ongoing fight against inflation.
  • Mixed economic updates from Mexico and the U.S. have traders weighing the Fed's rate cut discourse against the real data.

The Mexican peso capitalized on broad-based weakness in the US dollar on Monday, rising more than 0.1% in the North American session. The risk-off impulse was no excuse for Mexican currency bulls despite the Bank of Mexico's (Banxico) interest rate cut last week. Additionally, traders ignored comments from members of the Federal Reserve System (Fed) as the dollar remains under pressure. USD/MXN is trading at 16.69, down 0.28%.

Mexico's economic charter is missing, although Banxico Governor Victoria Rodriguez Ceja has crossed the wires. She said the first rate cut did not mean the end of the fight against inflation. She added that the central bank will make gradual adjustments to the main reference rates will be done with the upcoming data in mind.

Last week, the National Statistics Office (INEGI) revealed that the economy contracted in January compared to December, while mid-month inflation rose on both a monthly and annual basis.

Across the border, Federal Reserve officials have gone beyond intelligence. Atlanta Fed President Raphael Bostic said he favors one rate cut this year, while Chicago Fed President Austan Goolsbee anticipates three cuts in the Fed Funds rate (FFR). At the same time, Fed Governor Lisa Cook noted that premature rate cuts could increase the risk of inflation becoming entrenched.

The US schedule includes housing market data, the Chicago Fed National Activity Index and the Dallas Fed Manufacturing Index.

Daily roundup of market movements: Mexican peso gains on US dollar weakness on Monday

  • Banxico Governor Victoria Rodriguez Ceja said: “When macroeconomic conditions and the inflation outlook allow us to make additional adjustments to the benchmark rate compared to what we already have, I believe they would be gradual.”
  • Mexico's economy contracted for the fourth time in January. A gauge of general economic activity fell -0.6% month-on-month, below estimates of a 0.3% expansion, and slowed compared to December, missing estimates of 2.6% to print at 2%. Inflation in Mexico beat estimates of 4.45% and rose 4.48%, while the core data jumped above consensus of 4.62% year-on-year to 4.69%.
  • The outlook in Mexico suggests that the economy is stagnating. A weak report on retail sales, a sharp drop in private spending and a drop in economic activity justified Banxico's rate cut. Still, they face stubbornly stickier inflation and keep politicians on their toes.
  • The US economic calendar featured Fed speakers led by Atlanta Fed President Raphael Bostic, who said he expected only one rate cut this year, adding that cutting rates too soon could be more disruptive. Meanwhile, his counterpart, Chicago Fed President Austan Goolsbee, is sticking with most board members and expects three cuts, though he said he needed more evidence of “declining inflation.”
  • Fed Governor Lisa Cook recently echoed Bostic's comments, saying tapering too soon increases the risk of inflation becoming entrenched. She added that the Fed's dual-mandate goals aim for a better balance.
  • New home sales for February fell 0.3% month-over-month from 0.664 million to 0.662 million. The Chicago Fed National Activity Index improved from -0.54 to 0.05. According to the Chicago Fed, all four categories that make up the index improved month-on-month.
  • More recently, the Dallas Fed Manufacturing Index fell further from -11.3 in February to -14.4 in March. Wages and prices rose during the month, while expectations for future manufacturing activity generally improved.

Technical Analysis: Mexican peso gains strength as USD/MXN slips below 16.70

USD/MXN remains biased to the downside after hitting 16.94, which is last week's high. Since then, the exotic pair has fallen 1.45% and is poised for further losses. If the pair breaks below the current yearly low of 16.64, it could clear the way to test last year's cycle low of 16.62 and the October 2015 low of 16.32.

For a bullish scenario, traders need to retrace the current weekly high of 16.94 before the 17.00 figure. Next are key dynamic resistance levels such as the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.11, and the 200-day SMA at 17.20.

USD/MXN Price Action – Daily Chart

Frequently asked questions about the Mexican peso

The Mexican peso (MXN) is the most traded currency among its Latin American counterparts. Its value is largely determined by the performance of the Mexican economy, the policies of the country's central bank, the amount of foreign investment in the country, and even the level of remittances sent by Mexicans living abroad, particularly in the United States. Geopolitical trends can also move the MXN: for example, the process of nearshoring – or the decision of some firms to relocate production 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 center in the Americas. Another catalyst for MXN is oil prices, as Mexico is a key exporter of the commodity.

The main objective of Mexico's central bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its 3% target, which is the middle of the tolerance band between 2% and 4%). For this purpose, the bank sets a reasonable amount of interest rates. When inflation is too high, Banxico will try 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. Conversely, lower interest rates tend to weaken the MXN.

The release of macroeconomic data is key to assessing the state of the economy and can impact the valuation of the Mexican peso (MXN). A strong Mexican economy based on high economic growth, low unemployment and high confidence bodes well for the MXN. Not only will this attract more foreign investment, but it may encourage the Bank of Mexico (Banxico) to raise interest rates, especially if this force is coupled with increased inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging market currency, the Mexican peso (MXN) tends to be bullish during periods of risk, or when investors perceive broader market risks to be low and therefore seek higher risk investments. Conversely, MXN tends to weaken during times of market turbulence or economic uncertainty as investors tend to sell higher risk assets and flee to more stable safe havens.

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