- Mexican Peso gains, driven by a soft US Dollar due to lower US Treasury yields.
- Market anticipates Consumer Confidence, auto data and Banxico’s rate decision.
- Powell’s rate cut remarks prompt cautious trading; speeches by Fed’s Mester, Kashkari, Collins in focus.
The Mexican Peso (MXN) advanced against the US Dollar (USD) in early trading during the North American session as US Treasury bond yields edged lower, a headwind for the Greenback. A risk-on impulse, as witnessed by Wall Street posting gains, is a tailwind for the Mexican currency. Traders await inflation figures and the Bank of Mexico (Banxico) monetary policy meeting on Thursday. The USD/MXN exchanges hands at 17.05, down 0.34%.
Mexico´s economic calendar will gather some steam on Wednesday with the release of Consumer Confidence data. Then automobile industry data arrives on Wednesday. By Thursday, Banxico will get an early update on inflation ahead of their decision. The central bank will hold rates unchanged, most analysts predict.
Meanwhile, Federal Reserve (Fed) Chair Jerome Powell said the US central bank is in no rush to cut rates, instead reassuring the majority of Fed officials to expect three rate cuts. Ahead in the day, traders will get cues from Loretta Mester, Neil Kashkari and Susan Collins.
Daily digest market movers: Mexican Peso gathers traction awaiting crucial inflation data
- Mexico´s economic docket on Wednesday:
- Consumer Confidence was 46.8 in December, worse than November’s reading.
- Auto Exports were virtually unchanged at 16% YoY.
- Auto Production decreased in December by -9.9%.
- Mexico´s Consumer Price Index (CPI) in January is expected to rise from 0.71% to 0.88% MoM, while annual figures are foreseen at 4.88%, up from 4.66%.
- The US economy remains resilient after the first batch of data was released in February. Stronger-than-expected PMIs and a hot Nonfarm Payrolls report paint an optimistic outlook for the economy.
- Neil Kashkari commented that a strong economy means the Fed is in no hurry to make interest rate cuts. Kashkari acknowledged that inflation is making “rapid progress” toward the Fed’s 2% target and added that policy could not be sufficiently restrictive.
- Chicago Fed President Austan Goolsbee noted that inflation could remain falling amid a strong US economy,
- S&P Global comments about Mexico:
- Confirmed Mexico´s BBB foreign currency rating and BBB+ local currency long-term debt rating.
- Affirmed that stable macroeconomic conditions, with real growth in Gross Domestic Product above 3% in 2023, is supported by solid domestic demand and moderating inflation.
Technical analysis: Mexican Peso surges threatening to conquer the crucial 17.00 mark
The USD/MXN shifted from neutral to downward biased once it fell below the 50-day Simple Moving Average (SMA) at 17.12, which opened the door for further losses. A breach of that level exposed strong support, as seen at 17.05. Further downside is seen at the psychological 17.00 figure, followed by the current year-to-date low of 16.78.
On the other hand, if buyers reclaim the 50-day SMA, that can pave the way to test the 200-day SMA at 17.31. Upside risks emerge once that barrier is cleared. The next real resistance comes at 17.40, the 100-day SMA.
USD/MXN Price Action – Daily Chart
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.
