Mexican Peso strengthens against the US Dollar, as US inflation expectations drop
- Mexican Peso experiences some volatility to start the week, though it resumed its gains of more than 0.20%.
- Banxico's Governor Victoria Rodriguez Ceja's comments on potential rate cuts next year add pressure on the Mexican Peso.
- USD/MXN traders shrug off dovish remarks by Banxico’s Governor Victoria Rodriguez Ceja, which sees potential rate cuts in 2024.
Mexican Peso (MXN) advances solidly against the US Dollar (USD) after data revealed by the New York Fed showed inflation is cooling, according to US households, on Monday. Additionally, US Treasury bond yields extended their drop, undermining appetite for the Greenback (USD). At the time of writing, the USD/MXN is trading at 17.58, down 0.28%, after hitting a daily high of 17.72.
Mexico's economic docket is empty following last Thursday’s Bank of Mexico – also known as Banxico – decision to hold rates at 11.25% while removing hawkish comments from its statement, which weighed on the Mexican Peso. Dovish remarks by Banxico's Governor Victoria Rodriguez Ceja kept the USD/MXN trading downward pressured, but investors shrugged off Rodriguez's comments, as the exotic pair trended lower, printing a daily low of 17.57.
The US economic docket released the New York Fed Inflation Expectations survey. According to the data, American households estimated inflation for one year at 3.6% in October, which was slightly below last month's figure of 3.7%. The five-year inflation outlook dipped to 2.7% from the previous reading of 2.8%.
Daily digest movers: Mexican Peso remains range bound despite market sentiment shifting sour
- Banxico’s Governor Victoria Rodriguez commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
- Industrial production in Mexico cooled down, according to data provided by the National Statistics Agency (INEGI) on November 10. The output grew by 3.9% YoY in September, below the 4.4% forecast, trailing August’s 5.2%.
- The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
- Last Thursday’s hawkish remarks by the US Federal Reserve Chairman Jerome Powell sponsored the USD/MXN a leg up, toward 17.93, before paring some losses.
- 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.
- 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%).
Technical Analysis: Mexican Peso remains steady despite Golden Cross surfacing, USD/MXN stays in the green
The USD/MXN remains neutral to upward biased, at a brisk of breaking crucial resistance levels, like the 200-day Simple Moving Average (SMA) at 17.66, followed by the 50-day SMA at 17.70. Once those two levels are breached, the next resistance would emerge at the 20-day SMA at 17.91 before buyers could lift the spot price towards the 18.00 figure.
Conversely, key support levels lie at 17.50, followed by the November 9 low at 17.47 and the 100-day Simple Moving Average (SMA) at 17.33. A loss of the latter will expose the 17.00 psychological level before the pair aims to test the year-to-date (YTD) low of 16.62.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.