- Mexican Peso strengthens after US inflation report and unexpected rise in Initial Jobless Claims.
- Banxico’s latest report highlights ongoing disinflation, suggesting potential for future rate cuts.
- Market anticipates Banxico’s March 21 policy meeting amid discussions on gradual rate adjustments.
The Mexican Peso gained ground against the US Dollar in early trading on Thursday following the release of a US inflation report, coupled with Initial Jobless Claims surpassing expectations for the first time in four weeks. The USD/MXN is currently at 17.07, marking a 0.11% decline post the data release.
In Mexico’s economic updates, there was a slight increase in the Unemployment Rate, but it did not have a substantial impact on the USD/MXN. On Wednesday, the Bank of Mexico (Banxico) released its report for the last quarter of 2023, highlighting the ongoing disinflation process. Governor Victoria Rodriguez Ceja mentioned that the real ex-ante rate reached 7.47%, surpassing the Bank’s neutral rate, potentially paving the way for interest rate cuts.
Deputy Governors Jonathan Heath and Omar Mejia suggested a gradual approach to rate adjustments, with Heath hinting at a possible 25-basis-point cut, followed by reassessment of policy restrictiveness. Heath emphasized that declaring victory over inflation prematurely would be a mistake if the benchmark rate is cut more than suggested.
In response, Deputy Governor Irene Espinosa stated that Banxico’s Governing Council should consider both external and internal factors affecting inflation. Galia Borja, another deputy governor, advocated for cautious decision-making based on emerging inflation data. Against this backdrop, traders of USD/MXN are closely watching Banxico’s next monetary policy meeting scheduled for March 21.
On the US front, the Bureau of Economic Analysis (BEA) reported that the Personal Consumption Expenditure (PCE) Price Index increased as anticipated. The Core PCE, the Federal Reserve’s preferred measure for inflation, also rose as expected, supporting the central bank officials’ stance against premature interest rate cuts.
Daily digest market movers: Mexican Peso boosted by US inflation report
Mexico’s economic trajectory is poised for a slowdown, driven by the elevated interest rates set by Banxico at 11.25%. This shift has prompted three out of the five governors of the Mexican Central Bank to contemplate the possibility of the first rate cut at the upcoming March 21 meeting.
Banxico revised its economic growth projections for 2024 from 3.0% to 2.8% YoY while maintaining the forecast for 2025 at 1.5%. The anticipation for a monetary policy easing in March remains strong, with investors foreseeing a 75-basis-point reduction over the next six months. This would potentially bring the Mexican interest rates down from the current 11.25% to 10.50% in the first half of 2024.
The latest inflation report in Mexico indicates that both headline and underlying inflation are trending toward Banxico’s target of 3%, plus or minus 1%. Economic growth, while surpassing estimates, fell below Q3’s level of 3.3%.
Key economic data released in Mexico during the week includes a rise in the Unemployment Rate from 2.6% to 2.9% YoY in January, a trade deficit of $302 million in January, and a decrease in Mexico’s Consumer Price Index (CPI) for the first half of February to 4.45% from 4.9% YoY. Core CPI also slowed from 4.78% to 4.63% on an annual basis. Mexico’s GDP for Q4 2023 exceeded estimates at 2.5% but was lower than the Q3 2023 figure of 3.3%.
Economic trade issues between Mexico and the US, particularly the unresolved steel and aluminum dispute, pose a risk of currency depreciation for the Mexican Peso. The US Trade Representative Katherine Tai warned of the possibility of reimposing tariffs on these commodities.
In the US, January’s PCE Index rose 2.4% YoY, in line with expectations, while the Core PCE increased by 2.8% YoY, slightly below December’s 2.9%.
The USD/MXN declined following the US data release, as market participants increased the odds of the first 25-basis-point rate cut in June from 49% to 54.1% compared to a day ago. About 33% of investors expect the Fed to maintain rates unchanged at the current level of 5.25%-5.50%.
Technical analysis: Mexican Peso climbs as USD/MXN hovers around 50-day SMA
The USD/MXN is hovering around the 50-day Simple Moving Average (SMA) at 17.06, staging a modest recovery after a three-day decline but resuming its bearish trajectory on Thursday. The bearish sentiment is evident as the Relative Strength Index (RSI) remains below the 50-midline, providing sellers with optimism to target the key psychological level of 17.00. A breach of this level could lead to a descent towards the year-to-date (YTD) lows at 16.78, followed by the previous year’s low of 16.62.
On the flip side, a resurgence of buying interest around the 17.20 region could pave the way for further upside. The subsequent resistance zones to watch would be the 200-day SMA at 17.26 and the 100-day SMA at 17.31.
