Home Forex The Mexican peso ends the session on a positive note, but ends a losing week

The Mexican peso ends the session on a positive note, but ends a losing week

by SuperiorInvest


  • The Mexican peso is up more than 0.15%, overcoming weak retail sales data and sluggish economic growth projections.
  • Former Vice Governor Banxico Elizondo suggests continuing tight monetary policy in Mexico.
  • Improvements in US consumer sentiment and revised inflation expectations are likely to have limited the peso’s advance.

The Mexican peso (MXN) is making a comeback American dollar (USD) but remains set to post losses of more than 1.20% on the week after the country’s retail sales missed estimates and grew less than expected. In addition, the National Statistics Office (INEGI) revealed that the Mexican economy is likely to grow below the 3% expected by analysts in December in a preliminary reading of the Early Indicator of Economic Activity (IOAE). However, the USD/MXN exchange rate is at 17.08, down 0.47%, in favor of the emerging market currency.

Meanwhile, former Bank of Mexico (Banxico) Vice Governor Everardo Elizondo noted that it is too early to rest. Monetary Policy in Mexico, adding: “There are plenty of reasons to be concerned.” Elizondo added: “If [policy] will loosen, inflationary expectations will deteriorate.”

Across the border, consumer sentiment improved, with households revising their one- and five-year inflation expectations downward, according to a University of Michigan survey.

Daily market roundup: Mexican peso regains control amid mixed Mexican data

  • Mexican retail sales rose at least 0.1% month-on-month, below forecasts of 0.5% and behind October’s 0.7%. Year-on-year, the indicator slowed from 3.4% to 2.7%, which is less than estimates of 3.2%.
  • Mexico’s INEGI revealed that the Timely Indicator of Economic Activity (IOAE) expects economic growth of 2.6% in December.
  • Michigan’s preliminary consumer sentiment index hit its highest level since summer 2021 at 78.8, beating the forecast of 70 and the previous reading of 69.7. Joanne Hsu, director of consumer research, said: “Consumer sentiment was supported by confidence that inflation had turned a corner and boosted income expectations.”
  • US households’ one-year inflation expectations fell from 3.1% to 2.9% and from 2.9% to 2.8% over five years.
  • Existing home sales fell in December as supply showed signs of improvement, according to the National Association of Realtors. Sales rose 3.78 million, below estimates of 3.82 million, and missed November’s 0.8% increase.
  • The US economy remains robust as most data suggest the economy continues to expand at a steady pace. Atlanta’s HDPNow model suggests last year’s 4th quarter is likely to grow 2.4%, supported by strong retail sales, solid industrial production, a tight labor market and improving consumer sentiment.
  • Investors continued to limit bets on a rate cut by the Federal Reserve after the release of a Michigan survey of consumer sentiment. At the start of the week, the swap market for a rate cut in 2024 was trading at 175 basis points. But after solid US data this week, these were cut to 150 bps.
  • The strongest catalyst this week was Federal Reserve Governor Christopher Waller’s speech: “There is no reason to move as fast or cut as fast as in the past.” That kept investors in check despite support for rate cuts if inflation actually eases.
  • Mexico saw a jump in headline inflation, but underlying data suggested the Central Bank of Mexico (Banxico) did a good job of containing increased prices after a rate hike of 11.25%.
  • Despite indications from December’s Banxico (Central Bank of Mexico) meeting minutes that the bank may consider easing its monetary policy, December’s inflation report poses a potential obstacle to such policy easing.
  • Analysts at Standard Chartered noted: “We expect the key interest rate to be cut to 9.25% by the end of 2024, although an official downward revision of the output gap could open the door to more aggressive rate cuts.”
  • On Jan. 5, a Reuters poll suggested the Mexican peso could weaken 5.4% to 18.00 per US dollar in the 12 months to December.

Technical Analysis: The Mexican peso remains firm as USD/MXN hovers around the 100-day SMA

USD/MXN remained sideways in Friday’s trade, albeit with an upward tilt, as buyers regained the 17:00 psychological barrier. If they push the exchange rate towards the 200-day simple moving average (SMA) at 17.36, this could pave the way for a test of the 100-day SMA at 17.42. This level is ahead of the December 5 high at 17.56 and the May 23 high of 17.99.

On the other hand, a continued decline below 17.20 could pave the way for a decline towards 17.00. After the cleanup, a further drop to the January 8 low of 16.78 is expected. After a break, the next support would be the August 28 cycle low of 16.69, ahead of last year’s low of 16.62.

USD/MXN Price Action – Daily Chart

Frequently asked questions about central banks

Central banks have a key mandate that ensures price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant increase in the prices of the same goods means inflation, a constant decrease in the prices of the same goods means deflation. The task of the central bank is to keep demand in line with the adjustment of its base rate. For the largest central banks, such as the US central bank (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

The central bank has one important tool at its disposal to get inflation higher or lower, and that is by adjusting its reference base rate, commonly known as the interest rate. At pre-announced times, the central bank will issue a statement with its monetary policy rate and provide additional justification for either keeping it or changing (lowering or increasing) it. Local banks will adjust their savings and loan rates accordingly, making it harder or easier for people to cash in on their savings or for businesses to borrow and invest in their businesses. When a central bank raises interest rates substantially, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.

The central bank is often politically independent. Members of the central bank’s policy board go through a series of panels and hearings before being appointed to a policy board seat. Each member of this board often has certain beliefs about how the central bank should control inflation and subsequent monetary policy. Members who want a very loose monetary policy with low rates and cheap borrowing to substantially support the economy, while settling for inflation slightly above 2%, are called “doves”. Members who prefer to see higher rates as a reward for saving and want to keep an eye on inflation are called “hawks” and won’t rest until inflation is at or just below 2%.

There is usually a chairman or president who leads each meeting, needs to build consensus among the hawks or doves, and has the final say when votes are split to avoid a 50-50 tie on whether policy should be adjusted. The Chairman will deliver speeches, which can often be watched live, communicating the current monetary situation and outlook. The central bank will try to enforce its monetary policy without causing sharp swings in rates, stocks or its currency. All members of the central bank will direct their stance on the markets ahead of the policy meeting. A few days before the policy meeting, until the new policy is communicated, members are prohibited from speaking publicly. This is called the blackout period.

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