Mexican Peso appreciates on Fed’s decision, ends July with 1.30% losses
- Mexican Peso gains 0.88% against the USD as USD/MXN trades at 18.59.
- Fed's "hawkish" hold fails to boost USD, with policymakers highlighting balanced dual mandate risks.
- Powell acknowledges disinflation and labor market concerns, making Friday’s Nonfarm Payrolls report crucial.
- Banxico's Deputy Governor suggests gradual rate cuts amid Mexico's slowing economic growth.
The Mexican Peso soars sharply against the US Dollar even though the Federal Reserve delivered a “hawkish” hold and pushed back against reducing rates. Despite that, the Greenback failed to gain traction and the USD/MXN trades at 18.52, down over 0.80%.
In its monetary policy statement, Fed officials noted, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Fed policymakers stated that inflation despite easing, remains “somewhat elevated” and stated the dual mandate risks had become more balanced.
In the meantime, Fed Chair Jerome Powell expressed that the disinflation process has ‘broadened' and acknowledged downside risks in the labor market. Powell added that “We don't think of the labor market as it is currently as a likely source of inflation pressures” and that if they see a downturn in the labor market, “we should respond.”
Due to these remarks, Friday’s Nonfarm Payrolls report for July would be a crucial piece of the puzzle as the Fed pivoted towards becoming slightly concerned about employment.
Following Powell’s remarks, market participants had priced in 70 bps of interest rate cuts toward the end of the year.
On Wednesday, the Mexican economic docket was empty, yet traders shrugged off Tuesday’s data that showed the economy is decelerating. The Gross Domestic Product (GDP) for Q2 rose 0.2% QoQ, below estimates of 0.4% and a 0.3% increase in Q1. This justified comments by Omar Mejia Castelazo, a Deputy Governor at the Bank of Mexico (Banxico), who favors lowering rates gradually and emphasized that this would not mean the bank will embark on an easing cycle.
Across the border, US economic data showed that private hiring increased less than expected, according to Automatic Data Processing (ADP) Employment Change data for July.
Other data showed the Employment Cost Index (ECI) dipped three-tenths in Q2 2024, while Pending Home Sales bounced off record lows not reached since 2001.
The CME FedWatch Tool shows odds for a 25-basis-point rate cut in September at 100%. Data from the Chicago Board of Trade (CBOT) shows that the December 2024 fed funds rates futures contract suggests that policymakers will ease policy at least 55 basis points.
Daily digest market movers: Mexican Peso appreciates as economy cools down
- Mexico’s National Statistics Agency revealed that GDP for Q2 2024 grew 2.2% YoY on its preliminary reading, above estimates of 2% and the previous quarter's 1.6% expansion.
- Mexico’s Deputy Finance Minister Gabriel Yorio said that public debt is expected at a level of 48.6% of GDP at the end of President Andres Manuel Lopez Obrador’s term.
- Last week, Mexico’s June Balance of Trade was $-1.073 billion, missing the consensus of $1 billion.
- US ADP Employment Change in July showed that private hiring rose by 122K, below the estimated 150K and missing the 155K created in June.
- The Employment Cost Index (ECI) decelerated from 1.2% to 0.9% QoQ, below forecasts of 1%.
- Pending Home Sales in the US increased 4.8% MoM in June, exceeding estimates of 1.5% growth following May’s -1.9% plunge.
Technical analysis: Mexican Peso recovers as USD/MXN drops beneath 18.60
The USD/MXN is forming a “bearish engulfing” candlestick pattern amid growing expectations that Fed Chair Jerome Powell and company will hint at the first interest rate cut at the September meeting.
The Relative Strength Index (RSI) shows momentum falling steeply, meaning sellers are moving in anticipation of the Fed’s decision. This and the USD/MXN clearing the June 28 peak at 18.59 could pave the way for a deeper pullback.
That said, USD/MXN's first support would be the 18.50 level. Once surpassed, the next stop would be the psychological 18.00 mark, followed by the 50-day Simple Moving Average (SMA) at 17.97.
On the flip side, if buyers lift the exotic pair above 18.60, that could sponsor a leg up toward the year-to-date (YTD) peak of 18.99 ahead of 19.00 per US Dollar. Further upside is seen at the March 20, 2023, high of 19.23, ahead of 19.50.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.