The Mexican peso appreciated against the dollar, driven by the recent decision of the Fed and softer US employment figures.
The Banxico survey indicates expectations of a rate cut to 9.25% and a year-end exchange rate forecast of 18.50, which is influencing market sentiment.
The Mexican manufacturing sector shows an expansion with deceleration, which contrasts with the US data that points to a cooling of the labor market but an increase in manufacturing activity.
The Mexican peso (MXN) rose against the US dollar (USD) on Thursday, as market participants digested the latest decision by the Federal Reserve (Fed). In turn, US employment figures and a boost in risk appetite are favoring emerging market currencies. The USD/MXN pair is trading at 17.08, down 0.76%.
The Bank of Mexico (Banxico) released its expectations survey on Thursday, in which analysts estimate that the entity will lower rates to 9.25% and expect the exchange rate to end at 18.50. As for inflation expectations, private analysts estimate that it will be 4.17% and that economic growth will oscillate between 2.29% and 2.40%. Meanwhile, Mexico’s economic agenda shows that business activity in the manufacturing sector expanded, but is slowing down. Meanwhile, US economic data showed that the labor market is cooling, while manufacturing activity is gaining strength.
Daily summary of market movements: The Mexican peso appreciates and the dollar weakens after mixed US data
S&P Global revealed that manufacturing activity in Mexico is slowing sharply, with the PMI falling from 52.0 in December to 50.2.
US initial jobless claims for last week rose by 224,000, beating the previous reading of 215,000 and forecasts of 215,000. The data suggests that the labor market is cooling. The data suggests that the labor market is cooling amid a period in which US companies have announced plans to cut more than 82,300 jobs in the past month.
The S&P Global World Manufacturing PMI improved from 47.9 to 50.7 in January. The Institute for Supply Management (ISM) Manufacturing PMI improved from 47.1 to 49.1, beating forecasts of 47.
USD/MXN traders continued to digest the Federal Reserve’s latest decision to keep rates unchanged, as expected, and adopted a neutral stance. While officials had opened the door to cutting interest rates, they stressed the need to reaffirm that inflation is moving “sustainably” towards its 2% target. As for the financial balance sheet, its reduction would continue as planned in May 2023.
The Mexican economy grew below expectations in the last quarter of 2023.
GDP grew 0.1% quarter-on-quarter, below the 1.1% growth in the third quarter and forecasts of 0.4%.
Given that the Mexican economy remains solid, according to data released in January, the Bank of Mexico (Banxico) could delay monetary policy easing, as conditions remain warmer than expected.
However, if Banxico officials remain committed to starting their easing cycle in the first quarter of 2024, that could depreciate the emerging market currency due to narrowing interest rate differentials. This could also support the USD/MXN pair on its way to the psychological zone of 18.00.
Other factors that could depreciate the Mexican currency are geopolitical risks and risk aversion.
Technical Analysis: The Mexican peso recovers and the USD/MXN pair breaks below 17.15
USD/MXN remains sideways, but has broken below the 50-day simple moving average (SMA) at 17.13, exposing the exotic pair to further losses. If sellers recapture the January 22 daily low at 17.05, this could open the door to challenging the 17.00 figure.
On the other hand, if buyers recapture the 50-day SMA at 17.13, a recovery to 17.20 could occur. Once this level is overcome, the pair could continue to rise. Once this level is overcome, the next resistance would be the 200-day SMA at 17.33, followed by the 100-day SMA at 17.38.
Conclusion
The Mexican peso is expected to continue to appreciate against the US dollar in the short term, supported by the recent decision of the Fed and softer US employment figures. However, the peso could come under pressure in the medium term if the US economy continues to grow at a faster pace than the Mexican economy.
FAQ
MXN is the Mexican Peso, the most traded currency in Latin America.
Banxico is Mexico’s central bank, responsible for managing the MXN and controlling inflation.
High inflation weakens the MXN, raising living costs and reducing investment attractiveness.
USD/MXN exchange rate impacts trade and is influenced by monetary policy, interest rates, and economic factors.
Fed policy impacts the USD/MXN rate, affecting trade and investment flows in Mexico.
The recent Fed decision to hold rates, softer US employment data, and expectations of a Mexican rate cut are driving the appreciation.
Analysts surveyed by Banxico predict the peso to be at 18.50 pesos per dollar by December 2024.
It’s expanding but slowing down, contrasting with stronger US manufacturing activity.
It’s possible in the first quarter of 2024, but economic data might delay their decision.
17.20, 17.33 (200-day SMA), and 17.38 (100-day SMA).
