- USD/MXN falls as revised US inflation data supports Fed easing expectations.
- Inflation adjustments in the US show success in controlling prices, leading to a weakened outlook for the dollar.
- Banxico holds rates at 11.25%, with changes in policy statements indicating a cautious stance on future adjustments.
- Federal Reserve officials continue to defend the adequacy of current monetary policy.
The Mexican peso (MXN) appreciated against American dollar (USD), by the end of the week with a gain of 0.31%. Data from United States (USA) confirmed that the downward trend in inflation remains in place, which could open the door for the US central bank (Fed) to cut interest rates towards the second half of the year. USD/MXN is trading at 17.09, down 0.36%.
The Mexican economic report over the past two days has been packed. Inflation is heading higher, while the Central Bank of Mexico (Banxico) decided to keep rates at 11.25%, although it removed hawkish language from its monetary policy statement. Instead, they added: “Depending on the available information, they will consider the possibility of adjusting the reference rate at the next monetary policy meeting.”
Beyond the Border, Atlanta Fed President Raphael Bostic he said the Fed needed to be decisive, adding that it was “laser focused” on inflation. At the same time, Dallas Fed President Lorie Logan noted that rate cuts are not urgent.
Daily market roundup: Mexican peso appreciates despite Banxico dropping hawkish comments
- Banxico’s board of governors said inflation risks are tilted to the upside in the near term, adding that higher core inflation, currency depreciation and greater-than-expected economic resilience in the country will keep inflationary pressures on the upswing.
- On the other hand, the global economic slowdown and lower exchange rate levels relative to the first months of 2023 “contribute to reducing some inflationary pressures more than expected.”
- Mexico’s central bank revised upward its inflation expectations for Q1-Q3 2024, expecting it to approach 3.5% in Q4.
- Before Wall Street opened, the National Statistics Office (INEGI) reported that Mexican industrial production fell 0.7% in December from November and was flat year-on-year.
- On Thursday, INEGI revealed that Mexico’s consumer price index (CPI) rose 4.88% year-on-year in January, while core inflation eased to 4.76%.
- The U.S. Bureau of Labor Statistics (BLS) released a revision of inflation data that suggests the U.S. inflation rate at the end of 2023 was in line with original reports, even after annual revisions. Core CPI, which excludes food and energy, rose by an annualized 3.3% in Q4 2023, in line with previous estimates. The overall inflation figure underwent minimal adjustments, December’s monthly growth was slightly revised down to 0.2% from 0.3%.
- Initial US jobless claims of 218,000 last week were below estimates of 220,000, down from 227,000 in the previous reading.
- Federal Reserve officials remain cautious about guiding market participants on when to begin easing policy. Yesterday, Richmond Fed President Thomas Barkin was asked about Powell’s comments: “Chairman Powell always speaks for the committee.”
Technical Analysis: Mexican peso surges as USD/MXN slips below 17.10
USD/MXN is neutral to bearish biased after clashing with the 50-day simple moving average (SMA) at 17.12, with buyers unable to decisively break this level. Since then, the exotic pair has resumed its downtrend, although it could remain around 17.05/17.17. Another decline is in store as the Relative Strength Index (RSI) shows bears gaining strength with a slope peaking two days ago before extending their downtrend. Other support levels lie at 17.05, the psychological number of 17.00 and last year’s low of 16.62.
On the downside, if buyers retrace the 50-day SMA, it may pave the way for a test of the 200-day SMA at 17:31. Once this barrier is removed, upside risks will emerge. The next real resistance comes at 17.41, the 100-day SMA.
USD/MXN Price Action – Daily Chart
Risk Sentiment FAQs
In the world of financial jargon, the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to take during a reference period. In a risk-on market, investors are optimistic about the future and more willing to buy risky assets. In a “risky” market, investors start to “play it safe” because they are worried about the future, so they buy less risky assets that are more certain to produce a return, even if it is relatively modest.
Typically, during “risk-on” periods, stock markets will rise, most commodities – except gold – will also gain in value as they benefit from a positive growth outlook. Currencies of countries that are heavy commodity exporters are strengthening due to increased demand and cryptocurrencies are rising. In the “risk on” market, bonds go up – especially large government bonds – gold shines, and safe havens like the Japanese yen, Swiss franc and US dollar all benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and smaller FX like the Ruble (RUB) and South African Rand (ZAR) all tend to rise in “risk on” markets. This is because that the economies of these currencies are heavily dependent on commodity exports for growth, and commodities tend to rise in price during periods of risk, as investors anticipate greater demand for raw materials in the future due to increased economic activity.
The main currencies that tend to rise during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY) and the Swiss franc (CHF). The US dollar because it is the world’s reserve currency and because in times of crisis investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. Only from the increased demand for Japanese government bonds, since a high share is held by domestic investors who are unlikely to issue them – even in times of crisis. Swiss franc, as strict Swiss banking laws offer investors increased capital protection.