- Mexican Peso weakens in early North American trading as US Dollar gains strength.
- Mexican data is mixed though the economy finished 2023 on a higher note.
- Central bank divergence between Fed and Banxico could bolster USD/MXN pair.
During the early North American trading session, the Mexican Peso experienced depreciation against the US Dollar, with the latter climbing approximately 0.25%, as indicated by the US Dollar Index (DXY). There is speculation that the Bank of Mexico (Banxico) may ease its policy on Thursday, while traders are reducing the probability of the Federal Reserve’s first rate cut. The USD/MXN pair is currently trading at 16.83, marking a modest gain of 0.08%.
In Mexico, economic indicators such as Aggregate Demand and Private Spending were released, both surpassing the Q3 2023 figures. This suggests that the economy ended the year on a positive note. Meanwhile, across the border in the United States, housing data exceeded expectations and showed improvement compared to January’s data. All attention is now focused on the upcoming decision of the Federal Open Market Committee (FOMC) scheduled for Wednesday.
Daily digest market movers: Mexican Peso on defensive amid dovish Banxico
Expectations for a reduction in the interest rate by Banxico from 11.25% to 11% are exerting some pressure on the Mexican currency, potentially pushing the USD/MXN pair towards the 17.00 level.
Here are the key economic indicators released for Mexico on Tuesday:
- Aggregate Demand increased by 0.3% quarter-on-quarter (QoQ) in Q4, compared to 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%. However, on a yearly basis, it improved from 4.3% to 5.1%.
The movement of the USD/MXN pair is largely influenced by the narrowing of interest rate differentials between Mexico and the United States, potentially guiding it towards the 17.00 level.
Banxico is anticipated to lower interest rates on March 21, even though there might be a split vote of 3-2. Recent speeches and public appearances indicate a division within Banxico’s Governing Council. Governor Victoria Rodriguez Ceja, Omar Mejia Castelazo, and Galia Borja Gomez appear to lean towards a dovish stance, while Jonathan Heath and Irene Espinosa Cantellano are more hawkish.
The primary catalyst for Banxico’s potential rate cut is an economic slowdown in Mexico, which has led the central bank to revise its growth projections downwards. Banxico now expects the economy to grow by 2.8% year-on-year (YoY) in 2024, down from the previous forecast of 3%, with growth maintaining at 1.5% for 2025.
In the United States, Building Permits for February increased by 1.9% from 1.495 million to 1.518 million, indicating sustained demand. Housing Starts also saw a notable increase of 10.7% compared to January, rising from 1.425 million to 1.521 million.
Recent inflation figures in the United States have led investors to adjust their expectations for a less dovish stance. Money market futures now project the Federal Funds Rate (FFR) to reach 4.71% by year-end. The upcoming Fed meeting scheduled for March 19-20 is expected to maintain the Federal Funds Rate (FFR) unchanged, according to analysts’ estimates.
Technical analysis: Mexican Peso begins to weaken as USD/MXN aims above 16.80
The USD/MXN pair has transitioned to a neutral stance as buyers entered the market, propelling the exchange rate above the January 8 swing low of 16.78. After surpassing this level, the pair reached a new two-week high of 16.94. However, buyers are currently pausing before potentially targeting the 17.00 mark. Once this barrier is breached, the next resistance levels to watch include the 50-day Simple Moving Average (SMA) at 17.02, followed by the 100-day SMA at 17.16 and the 200-day SMA at 17.21.
Conversely, for the exotic pair to resume its downward momentum, it would need to drop below the 16.80 level. Such a move could open the door for a retest of last year’s low at 16.62, followed by the low from October 2015 at 16.32 and the psychological support level of 16.00.
USD/MXN Price Action – Daily Chart
