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Mexican Peso slips modestly against the US Dollar, reflecting cautious sentiment before US CPI release.
US Dollar finds footing after last week’s drop, bolstered by adjustments in Treasury yields.
Industrial Production data looms for Mexico with forecasts pointing to a monthly decline alongside annual growth.
The Mexican Peso posts minuscule losses against the US Dollar on Monday amid a risk-off impulse ahead of the release of the latest inflation report in the United States. The Greenback is rebounding off last week’s losses, while US Treasury yields recovered some ground. The USD/MXN trades at 16.80, up 0.08%.
Mexico’s economic docket would feature Industrial Production on Tuesday, which is expected to drop -0.7% monthly and is estimated to grow by 2.2%. Across the border, the New York Fed revealed that inflation expectations for one year stood at 3% and for three years dropped from 2.7% to 2.4%. On Tuesday, the US Bureau of Labor Statistics (BLS) is expected to reveal February’s Consumer Price Index (CPI).
Last week, Federal Reserve Chair Jerome Powell reiterated the Fed is not ready to cut rates until they (the Fed) are convinced that inflation is cooling down toward the 2% target.
Data-wise, business activity in the sector segment in the US remained mixed, while Factory Orders plummeted. According to the ADP Employment Change report, the labor market cooled further, even though private hiring remained solid. January’s Nonfarm Payrolls report was revised downward, which triggered a reaction in the swaps market.
A Reuters poll showed investors estimate the Fed to be the first central bank to cut rates in June.
Meanwhile, 52 of 108 economists expect the Fed to cut rates by 75 basis points in 2024, with 26 saying 100 bps.
A Reuters poll sees the Mexican Peso depreciating 7% to 18.24 in 12 months from 16.96 on Monday, according to the median of 20 FX strategists polled between March 1-4. The forecast ranged from 15.50 to 19.00.
A Reuters poll shows 15 analysts estimate that inflation will slow down in February, corroborating bets that the Bank of Mexico (Banxico) could cut rates as soon as the March 21 meeting.
Banxico’s private analysts’ poll projections for February were revealed. They expect inflation at 4.10%, core CPI at 4.06%, and the economy to grow by 2.40%, unchanged from January. Regarding monetary policy, they see Banxico lowering rates to 9.50% and the USD/MXN exchange rate at 18.31, down from 18.50.
During Banxico’s quarterly report, policymakers acknowledged the progress on inflation and urged caution against premature interest rate cuts. Governor Victoria Rodriguez Ceja said adjustments would be gradual, while Deputy Governors Galia Borja and Jonathan Heath called for prudence. The latter specifically warned against the risks of an early rate cut.
Banxico updated its economic growth projections for 2024 from 3.0% to 2.8% YoY and maintained 1.5% for 2025. The slowdown is blamed on higher interest rates at 11.25%, which sparked a shift in three of the five governors of the Mexican Central Bank, who are eyeing the first rate cut at the March 21 meeting.
The CME FedWatch Tool shows traders increased their bets for a 25-basis-point rate cut in June to 72%.
The USD/MXN is downwardly biased, though it appears to have bottomed out near 17.80. The Relative Strength Index (RSI) has edged up, but downside risks remain. If sellers push the prices below the current year-to-date (YTD) low of 16.76, that could pave the way for challenging last year’s low of 16.62.
On the other hand, if buyers reclaim the 17.00 figure, that could open the door to testing the 50-day Simple Moving Average (SMA) at 17.05, followed by the 200-day SMA at 17.23 and the 100-SMA at 17.24.
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
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