Most recent article: Mexican Peso rallies for fourth day as US markets rebound
The Mexican Peso (MXN) rallied against the US Dollar (USD) on Friday, ignoring softer-than-expected economic data revealed during the week that suggests the economy might slow down. A deterioration of consumer sentiment in the United States (US) exerted pressure on the Greenback, which is poised to finish the week with losses. The USD/MXN trades at 19.86, down more than 1%.
The market mood turned buoyant, a tailwind for the emerging market currency. Dismal reports in Consumer Confidence and Industrial Production in Mexico paint a gloomy economic outlook, further confirmed by Banco de Mexico (Banxico) Director of Economic Research Alejandrina Salcedo Cisneros.
She commented that uncertainty is impacting the country’s business, hinting at an outlook for a moderate expansion of regional economies. Banxico estimated economic contraction in all regions of the country. Nationwide, growth declined -0.6 % in Q4 compared to the previous quarter in seasonally-adjusted figures.
In the US, the University of Michigan (UoM) Consumer Sentiment Index registered a dismal print, while inflation expectations aimed higher due to US President Trump’s tariffs.
Traders' eyes are on next week’s Federal Reserve (Fed) policy decision. Last Friday, Fed Chair Jerome Powell revealed that “market measures of inflation expectations have moved up, driven by tariffs.”
Next week, traders will look at Retail Sales, housing data, the Fed’s monetary policy decisions and economic projections.
The USD/MXN finally cleared the 20.00 figure, hitting a fourth-month low of 19.84 earlier during the North American session. Momentum favors further downside on the pair as depicted by the Relative Strength Index (RSI) turning bearish and closing into oversold territory. Hence, the path of least resistance is tilted to the downside.
The USD/MXN first support would be the 200-day Simple Moving Average (SMA) at 19.67. If surpassed, the next stop would be the 19.50 figure, ahead of the September 18 swing low of 19.06. For a bullish resumption, the pair’s first ceiling level is 20.00. A decisive break will expose the 100-day SMA at 20.35.
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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