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Mexican Peso advances steadily after Banxico maintains rates

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FXStreet in Market News 12 399223
June 29, 2024 05:05

content provided with permission by FXStreet

  • Mexican Peso rebounds to 18.24 vs. US Dollar following Banxico’s decision to maintain 11.00% rate.
  • Decision aligned with recent inflation data, targeting 3% inflation by Q4 2025.
  • Inflation risks heightened by service sector, cost pressures, Peso fall and geopolitical tensions.

The Mexican Peso recovered ground against the US Dollar and rallied more than 1% on Friday after the Bank of Mexico (Banxico) decided to keep rates unchanged due to “idiosyncratic factors” and the Peso’s depreciation following the June 2 general election results. The USD/MXN trades at 18.24 after hitting a daily high of 18.59.

Banxico left a lifeline to the battered Peso on Thursday, holding rates at 11.00% after inflation reaccelerated, according to June’s mid-month inflation data.

The Mexican institution expects headline inflation to converge to the bank’s 3% target by Q4 2025 and acknowledged that inflation risks are skewed to the upside due to high services inflation, cost pressures, Mexican Peso depreciation and geopolitical conflicts.

Across the border, the US Federal Reserve’s (Fed) preferred inflation gauge came as expected by the consensus, showing an improvement in headline and core Personal Consumption Expenditures (PCE) Price Index.

The data failed to underpin the Greenback, which remains pressured, losing some 0.16% as revealed by the US Dollar Index (DXY). Therefore, the USD/MXN might continue on the back foot toward the remainder of the day as sellers eye an April 19 high of 18.15.

Daily digest market movers: Mexican Peso strengthens after Banxico hold

  • Banxico’s decision was not unanimous and was perceived as dovish as Deputy Governor Omar Mejia Castelazo opted for a quarter of a percentage rate cut.
  • Mexico’s central bank monetary policy statement highlighted the Governing Board expects the disinflation process to evolve and added that “Looking ahead, the board foresees that the inflationary environment may allow for discussing reference-rate adjustments.”
  • A Citibanamex survey showed economists priced out fewer rate cuts by the central bank. They also revised the Gross Domestic Product (GDP) for 2024 downward from 2.2% to 2.1% YoY and expect the USD/MXN exchange rate to finish the year at 18.70, up from 18.00 previously reported.
  • US PCE was lower than April’s 0.3% and was 0% MoM as expected. Core PCE expanded by 0.1% MoM as estimated, which is also beneath the previous reading of 0.3%.
  • US Consumer Sentiment final reading for June of 68.2 deteriorated compared to May’s 69.1, yet improved as the preliminary reading was 65.8. Inflation expectations remained steady in the short and long periods at 3%.
  • CME FedWatch Tool shows odds for a 25-basis-point Fed rate cut at 59.5%, unchanged from the previous day.

Technical analysis: Mexican Peso climbs as USD/MXN tumbles below 18.30

The USD/MXN is undergoing a pullback after hitting a daily high of 18.59 earlier in the day, opening the door to challenging key support levels. From a momentum standpoint, sellers are gathering some steam. This is depicted by the Relative Strength Index (RSI) pointing downward though still remaining bullish, suggesting the pullback could be short-lived.

For a bearish continuation, sellers need to reclaim the April 19 high turned support at 18.15, which would pave the way toward 18.00. The next support would be the 50-day Simple Moving Average (SMA) at 17.37 before testing the 200-day SMA at 17.23.

On the other hand, if buyers achieve a decisive break above the psychological 18.50 level, the next stop would be the year-to-date (YTD) high of 18.99, followed by the March 20, 2023, high of 19.23.

Banxico FAQs

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.