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Mexican Peso drops as risk-aversion takes hold, boosts the US Dollar

October 18, 2023| Forex Market


  • Mexican Peso exchange rate with the US Dollar registers 0.90% gains, as USD/MXN buyers reclaim 18.00.
  • Geopolitical tensions escalate with developments in the Israel-Hamas conflict and the potential involvement of Iran.
  • Banxico’s Deputy Governor Mejia: Inflation would hit the central bank’s target in 2025, with the current policy stance.

Mexican Peso (MXN) remains offered early in Wednesday’s North American session, particularly against the US Dollar (USD) amid a risk-off impulse spurred by threats of an escalation in the Israel-Hamas conflict. Consequently, Treasury bond yields in the United States (US) rose, lifting yesterday’s battered US Dollar. The USD/MXN trades at 18.18 after bouncing from daily lows of 17.96.

Geopolitics are taking center stage on Wednesday, after US President Joe Biden’s visit to Israel. Biden said Israel was not responsible for a blast that hit a Gaza hospital contrary to Palestinian claims. His decision to back Israel’s version of events ignited tensions across the region, with Iran threatening to enter the conflict. The consequent risk aversion boosted the US Dollar, to the detriment of the emerging market currency.

Meanwhile, the lack of data in Mexico’s economic docket put the Bank of Mexico (Banxico) Deputy Governor Omar Mejia in the spotlight. In comments on a podcast, Mejia said the balance of inflation risks has not worsened, reported Reuters. The Banxico official added the current restrictive monetary policy is succeeding at curbing inflation to its target, and that it would reach Banxico’s target by the second quarter of 2025.

The US economic calendar featured Building Permits, which plummeted -4.4% compared to last month’s data, while Housing Starts improved to 7%, from August’s -12.5% plunge.

Daily Digest Market Movers: Mexican Peso sways with market sentiment; USD/MXN reaches 7-day peak

  • US Retail Sales in September grew by 0.7% MoM, above forecasts of 0.3%, but trailed upward revised August’s 0.8%.
  • Industrial Production rose 0.3% MoM, better than expected, and the previous month’s 0.0% reading.
  • Mexico’s GDP in 2023 is expected to hit 3.2%, according to the World Bank and the International Monetary Fund.
  • New York Fed Empire State Manufacturing Index for October fell to -4.6, higher than forecasts of -7 but worse than September’s 1.9 expansion.
  • Philadelphia Fed President Patrick Harker commented the current level of rates kept house buyers on the sideline, highlighting that the Fed is likely done hiking rates.
  • According to the Financial Times, Chicago Fed President Austan Goolsbee said the fall in US inflation is not a blip.
  • US Inflation expectations for one year rose from 3.2% to 3.8%, while for five years jumped to 3% from 2.8%.
  • Mexico’s Industrial Production (IP) for August improved by 5.2% YoY, exceeding forecasts of 4.6% and July’s 4.8% increase.
  • Monthly, IP in Mexico rose 0.3%, as expected, but trailed the previous 0.5% reading.
  • The US Consumer Price Index increased 3.7% YoY in September, unchanged from August but above forecasts of 3.6%.
  • US core CPI dipped as expected to 4.1% from 4.3% in August.
  • Mexico’s Consumer Price Index (CPI) grew by 4.45% YoY in September, slightly below the 4.47% estimated.
  • The core CPI inflation in Mexico stood at a stickier 5.76% YoY, as widely estimated, but has broken below the 6% threshold.
  • The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).

Technical Analysis: Mexican Peso outlook deteriorates, as USD/MXN buyers eye 18.50

The Mexican Peso continues to weaken against the US Dollar after the USD/MXN broke the resistance at 18.10, rallying to a new weekly high of 18.30 before retracing somewhat to current spot prices. Hence, the exotic pair bias remains bullish, and it might test the October 6 high of 18.48 before climbing towards 19.00. On the other hand, if USD/MXN dives below 18.10, traders could expect a test of the psychological 18.00 figure.

Banxico FAQs

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.

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