Mexican Peso slumps amid risk-aversion; Banxico remains firm on inflation stance
- Mexican Peso exchange rate with the US Dollar registers 1.29% gains as USD/MXN bulls reclaim 18.00.
- Escalating tensions in the Israel-Hamas conflict and rising US Treasury bond yields contribute to the Peso's decline.
- The Federal Reserve's Beige Book indicates a stable US economic outlook, though potential for softer expansion is noted.
- Banxico’s Deputy Governor Mejia: Inflation would hit the central bank’s target in 2025, with the current policy stance.
Mexican Peso (MXN) finished Wednesday’s session with more than 1.20% losses against the US Dollar (USD), as market sentiment shifted sour on escalation threats in the Israel-Hamas conflict. Consequently, Treasury bond yields in the United States (US) rose, lifting yesterday’s battered US Dollar, as he USD/MXN trades at 18.22 after bouncing from daily lows of 17.96.
US President Joe Biden's visit to Israel aimed to ease tensions so far has failed. An explosion at a Gaza hospital blamed on Israel augmented Iran’s rhetoric towards the latter as the country discusses imposing an Oil embargo on Israel. Aside from this, the Federal Reserve’s Beige Book updated the economic outlook in the US as stable, though it may suffer a softer expansion, according to its latest survey of regional business bank contacts.
Bank of Mexico (Banxico) Deputy Governor Omar Mejia has stated that the balance of inflation risks has not deteriorated. He emphasized that the current restrictive monetary policy effectively controls inflation and expects it to reach Banxico's target by the second quarter of 2025. This suggests Banxico remains committed to its tightening stance to address inflation concerns.
Daily Digest Market Movers: Mexican Peso sways with market sentiment; USD/MXN reaches 7-day peak
- US Building Permits plummeted -4.4% in September, compared to last month’s 6.8% increase.
- Housing Starts for the same period previously mentioned rose by 7%, exceeding August’s -12.5% plunge.
- 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.
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.