Mexican Peso trends lower post-Banxico rate cut. USD/MXN rises
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Christian Borjon Valencia
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21 Mar @ 04:18 (GMT+0)

Mexican Peso trends lower post-Banxico rate cut. USD/MXN rises

  • Mexican Peso stays on the defensive after Banxico meeting.
  • Banxico’s rate cut marks the beginning of an easing cycle, though decision was not unanimous.
  • Banxico commits to monitoring inflation closely, aiming for a 3% target by Q2 2025 amidst ongoing restrictive policies.
  • Mexico’s retail sales data indicate cautious consumer spending, justifying Banxico's decision for a rate cut.

The Mexican Peso (MXN) continues to trend lower against the US Dollar (USD), remaining within familiar levels after the Bank of Mexico – also known as Banxico, decided to cut rates for the first time since mid-2021. Banxico’s decision was not unanimous, as Deputy Governor Irene Espinosa voted to hold rates unchanged. At the time of writing, the USD/MXN trades at 16.74, up 0.40%

Mexico’s Central Bank began its easing cycle on Thursday by adjusting the main reference rate from 11.25% to 11.00% in a 4 to 1 vote split. Banxico’s Governing Council noted that it would continue monitoring inflationary pressures and that the decision would depend “on available information” in the next monetary policy meetings.

The Bank of Mexico expressed that policy remains restrictive, that the disinflation process would continue, and expects to reach its goal of 3% in the second quarter of 2025.

In the meantime, traders continued to digest the latest monetary policy decision by the Federal Reserve, which held rates unchanged and kept their projections for three 25 bps rate cuts toward year end. Although revising the federal funds rate (FFR) level upward to 3.9%, the Fed’s decision was perceived as dovish.

Daily digest market movers: Mexican Peso weakens as reduction of rate differentials looms

  • Mexico’s Retail Sales fell -0.6% MoM in January, missing estimates of 0.4% expansion but better than December’s data. Yearly figures plummeted from -0.2% to -0.8%, smashing projections for a 1.2% expansion.
  • Mexico’s economic data released in the week:
    • Aggregate Demand rose by 0.3% QoQ in Q4, up from 0%. On an annual basis, it decelerated from 2.7% to 2.6%.
    • Private Spending on a quarterly basis slowed from 1.2% to 0.9%. On a yearly basis, it improved from 4.3% to 5.1%.
  • The slowdown in Mexico’s economy is one of the main reasons that Banxico is eyeing the first cut. Mexico’s central bank expects the economy to grow 2.8% YoY in 2024, down from 3%, but maintains its 1.5% prior call for 2025.
  • The US economic schedule revealed that Initial Jobless Claims for the week ending March 16 rose by 210K, below estimates of 215K and the prior week’s figures.
  • S&P Global PMI figures for the United States were mixed, with Services and Composite PMI readings cooling but remaining in expansionary territory. The S&P Global Manufacturing PMI was the outlier, exceeding estimates of 51.7 and the previous reading of 52.2 by jumping to 52.5.
  • Existing Home Sales rose by 9.5% from 4 million to 4.38 million.
  • The latest inflation figures in the United States prompted investors to price in a less dovish stance. Money market futures have adjusted their rate cut expectations to be more in line with the Fed's as they foresee theFFR at 4.71% toward the end of the year. Analysts estimate the Fed will not change its FFR level until June or later.

Technical analysis: Mexican Peso treads water as USD/MXN accelerates to 16.80

As mentioned on Wednesday, “the USD/MXN is neutral to downwardly biased after buyers lifted the exchange rate to a weekly high of 16.94 before retreating beneath 16.80.”  However, with the Mexican Central Bank decision looming, a quarter percentage rate cut could lift the exotic pair and break key resistance levels.

The first resistance would be the March 19 cycle high at 16.94, followed by the psychological 17.00 figure. Up next would be a busy area of dynamic supply zones, led by the 50-day Simple Moving Average (SMA) at 17.01, the 100-day SMA at 17.12 and the 200-day SMA at 17.20.

On the other hand, sellers must drag the exchange rate below the current year-to-date low of 16.64 before challenging last year’s low of 16.62.

USD/MXN Price Action – Daily Chart

 

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.