- Mexican Peso witnessed a pullback from Tuesday´s gains despite an upbeat market sentiment.
- Banxico is expected to hold rates at 11.25%, according to a Reuters poll.
- USD/MXN aims higher on hawkish commentary by Federal Reserve officials.
Mexican Peso erases some of its Tuesday’s gains, though it has recovered from trading near daily lows amid an upbeat market sentiment after Federal Reserve (Fed) speakers pushed back against the perception that the Fed had finished raising interest rates. At the time of writing, the USD/MXN exchanges hands at 17.49 posting a gain of 0.10%.
Mexico´s economic docket remains scarce, with market players awaiting the Bank of Mexico (Banxico) monetary policy meeting on November 9. A Reuters survey polled 18 economists who expect Banxico to hold rates at an all-time high of 11.25%, reached since March. Banxico officials had reiterated they would keep rates at the “current level” as they fight to bring inflation down. The latest Consumer Price Index (CPI) data in September witnessed Mexico’s inflation at 4.27%. A Tuesday poll by Reuters, noted that economists expect inflation to rise to 4.28% in October.
In the meantime, Fed Chairman Jerome Powell crossed the wires but did not comment on monetary policy.
Daily digest movers: Mexican Peso on the defensive on hawkish comments by Fed officials
- Hawkish commentary by Minnesota Fed President and Fed Governor Michelle Bowman underpins the Greenback (USD), which shows decent gains.
- This comes after Kashkari questioned whether the Fed has raised rates enough due to the economy’s resilience, on Tuesday. He added an uptick in inflation would trigger another rate hike by the Fed.
- Fed Governor Michelle Bowman expressed that the Fed may need to raise interest rates further to control inflation. However, she also noted that the significant increase in Treasury yields since September has led to tighter financial conditions.
- The US Dollar Index (DXY), a gauge that tracks the buck´s value against a basket of six currencies, advances 0.18%, changing hands at 105.69.
- The US 10-year Treasury bond yield is almost flat at 4.565%
- Money market futures have priced in a 25 bps rate cut by the Federal Reserve in July 2024.
- Mexico´s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
- On October 24, Mexico’s National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September and below forecasts of 4.38%.
- Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
- Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9 at 19:00 GMT
Technical Analysis: Mexican Peso buyers in charge though a golden-cross looms
The USD/MXN remains neutrally biased, though about to form a golden cross with the 50-day Simple Moving Average (SMA) crossing above the 200-day SMA, each at 17.67 and 17.68, respectively. That could pave the way for further upside. However, buyers need to lift the exchange rate above the 17.70 area, so they can challenge the 20-day SMA at 17.95, ahead of the psychologically 18.00 figure.
On the flip side, look for key support levels at Monday’s low of 17.40, followed by the 100-day Simple Moving Average (SMA) at 17.32. A breach of the latter will expose the 17.00 figure before the pair aims to test the year-to-date (YTD) low of 16.62.
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.