- Mexican Peso losses steam as USD/MXN paired earlier losses.
- Banxico’s split decision to cut rates to 11.00% provides a nuanced outlook, contributing to the Peso’s resilience.
- Mexico’s economic performance shows contraction in January and high inflation data.
- Banxico underscores a data-dependent approach, aiming for a 3% inflation target by the second quarter of 2025.
Late on Friday, the Mexican Peso (MXN) experienced a decline against the US Dollar (USD) following decisions by both central banks, the Federal Reserve (Fed) and the Bank of Mexico (Banxico), to maintain and cut interest rates respectively, driven by their respective disinflationary trends. Despite Banxico’s more balanced tone at the Governing Council, the emerging market currency displayed signs of weakness. The USD/MXN pair traded at 16.76, marking a 0.15% increase.
On the economic front, Mexico’s data released on Friday indicated a contraction in the economy in January compared to December, while the mid-month inflation report exceeded expectations both on a monthly basis and in the 12-month period leading up to March.
Banxico’s decision to reduce interest rates did not significantly impact the USD/MXN exchange rate, despite the narrowing interest rate differential between the Mexican Central Bank and the Fed. The Banxico Governing Council lowered the main reference rate to 11.00%, emphasizing that future monetary policy decisions would depend on data.
The Bank of Mexico reaffirmed that its policy remains restrictive, anticipating a continuation of the disinflation process, with the expectation of reaching its 3% target in the second quarter of 2025.
Daily digest market movers: Mexican Peso strengthens despite rate differential reduction
- Mexico’s inflation surpassed estimates, rising by 4.48% compared to the anticipated 4.45%, with core figures climbing even higher than expected at 4.69% year-on-year (YoY), exceeding the consensus of 4.62%. The National Statistics Agency (INEGI) revealed these figures on Friday. Additionally, Economic Activity saw a sharp decline of -0.6% month-on-month (MoM), falling short of the anticipated 0.3% expansion and slowing compared to December’s performance, which was projected at 2.6% but ended up at 2%.
- The economic outlook for Mexico indicates a stagnating economy, supported by weak retail sales, a significant drop in private spending, and a contraction in economic activity, justifying Banxico’s decision to cut rates. However, policymakers are faced with persistently high inflation, which requires careful monitoring.
- Retail sales in Mexico declined by 0.6% MoM in January, missing estimates of a 0.4% expansion but showing improvement compared to December’s data. Yearly figures plummeted from -0.2% to -0.8%, significantly below the projected 1.2% expansion.
- Aggregate Demand in Q4 rose by 0.3% quarter-on-quarter (QoQ), up from 0% previously. On an annual basis, it decelerated from 2.7% to 2.6%. Private Spending, on a quarterly basis, slowed from 1.2% to 0.9%, but on a yearly basis, it improved from 4.3% to 5.1%.
- Traders are currently analyzing the Federal Reserve’s recent monetary policy decision, where rates were held unchanged and projections for three 25 basis points rate cuts towards year-end were maintained. Despite revising the federal funds rate (FFR) level upward to 3.9%, the Fed’s decision was interpreted as dovish. Money market traders now perceive a 73.2% chance of the Federal Reserve cutting rates by a quarter of a percentage point.
Technical analysis: Mexican Peso treads water as USD/MXN accelerates to 16.80
The USD/MXN daily chart indicates a loss of momentum among buyers, with the pair poised to test lows not seen since 2015. The inability of buyers to surpass the 17.00 level following Banxico’s rate cut suggests an imbalance between supply and demand. In this scenario, the pair’s initial support levels would be the current year-to-date low of 16.64, followed by last year’s cycle low at 16.62, and October 2015’s low of 16.32.
For a bullish scenario to unfold, traders need to reclaim this week’s high of 16.94, followed by the critical 17.00 level. Beyond that, key dynamic resistance levels include the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.11, and the 200-day SMA at 17.20.
USD/MXN Price Action – Daily Chart
