- The Mexican Peso hovers around 17.60s as market participants await Banxico’s monetary policy decision.
- The Unemployment Rate in Mexico remains at around 3%, as revealed by the latest report from INEGI.
- The USD/MXN to remain downward pressured by interest rate differentials between Mexico and the United States.
The Mexican Peso (MXN) continues to gain ground during the mid-North American session, with traders awaiting the latest monetary policy decision by the Bank of Mexico, which is widely expected to hold rates unchanged at 11.25%, according to a Reuters poll. Market participants are also eyeing Banxico’s opinion regarding the 2024 economic budget presented by the Government of President Andres Manuel Lopez Obrador, which projects an increase in the deficit to 4.9%.At the time of writing, the USD/MXN hovers around the 17.60s region.
Aside from this, the latest round of economic data revealed the Unemployment Rate in Mexico edged lower, as revealed by the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). Numbers came at 3.0%, below July’s 3.1%, while on a seasonally adjusted rise ti 2.7%, beneath the prior’s month 2.9%.
Daily Digest Market Movers: Mexican Peso fails to decisively crack support at 17.6000, as buyers prepare to attack the 200-day SMA
- The Mexican Peso recovered some ground after depreciating to levels last seen in late May 2023 and approached the 200-day Simple Moving Average (SMA) at 17.88411 on risk aversion.
- The Bank of Mexico is expected to keep its monetary policy restrictive and hold rates unchanged at 11.25%.
- September’s first-half inflation report in Mexico was 4.44%, down from 4.64% in August, according to the National Statistics Agency, INEGI.
- Being an emerging market currency, the Mexican Peso weakens on risk aversion. Therefore, news emerging of a possible US government shutdown triggered a flow toward safe-haven assets, weakening the Mexican Peso.
- The drop in Oil prices weakens the Mexican currency, as its economy relies on crude exports.
- Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
- In July, Moody lowered Mexico’s rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
- US Treasury bond yields jumped after September’s Federal Reserve Open Market Committee (FOMC) decision to hold rates unchanged. However, the dot plots above 5% in 2024 confirmed the Federal Reserve’s higher-for-longer mantra.
- Recent US Dollar strength weighed on the Mexican currency after printing multi-month highs.
Technical Analysis: Mexican Peso
The Mexican Peso found its foot after depreciating to 17.8161 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.8410, though it is staging a comeback and trimming some of its losses, currently below the 17.6000 area. Nevertheless, further upside is expected after printing a new cycle high, while the 50-day SMA reduces the distance to the 100-day SMA. Near-term, actual price action could be seen as a pullback, as the Relative Strength Index (RSI) aims lower, though the uptrend remains intact.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
