- Mexican Peso slips from multi-year lows, reacting to optimistic US growth figures and labor market resilience.
- Strong US GDP growth in Q4 2023 and a robust labor market boosted the US Dollar, a headwind for the Mexican currency.
- Fed’s Waller remains hawkish, adhering to the “higher for longer” mantra.
The Mexican Peso was on the defensive against the US Dollar on Thursday, with buyers capitalizing on the exotic pair’s dip toward an over eight-year low of 16.51. Hawkish comments by Federal Reserve (Fed) Governor Christopher Waller and an absent Mexican economic docket sponsored a leg up in the USD/MXN. At the time of writing, the pair trades at 16.62, up 0.50%.
In addition to Fed speeches, US economic data has been the main driver of price action. The US Bureau of Economic Analysis (BEA) revealed that the US economy grew above estimates in the last quarter of 2023, as measured by the Gross Domestic Product (GDP). At the same time, a report by the US Bureau of Labor Statistics (BLS) portrayed a tight labor market, with fewer Americans applying for unemployment benefits.
Further data showed an improvement in the housing market as Pending Home Sales recovered in February from January.
Daily digest market movers: Mexican Peso weighed by hawkish comments of Fed’s Waller
- On Monday, Banxico Governor Victoria Rodriguez Ceja remained dovish via an interview with El Financiero. Governor Rodriguez commented that the battle against inflation hasn’t been concluded, though adding that it would discuss further rate cuts to the main reference rate in upcoming meetings. “When macroeconomic conditions and the inflationary outlook allow us to make additional adjustments to the reference rate to the one we already have, I consider that they would be gradual.”
- Banxico revealed that international reserves grew to $216.9 billion, adding $411 million in US Dollars through March 22.
- Mexico’s Balance of Trade in February printed a deficit of $-0.5 billion, lower than the $-4.31 billion in January but missing expectations of $-0.2 billion. Other data showed that the Unemployment Rate in February dropped from 2.9% to 2.5%, which is below the consensus of 2.8%.
- Mexico’s Indicator of General Economic Activity flashed signs of contraction in January, justifying Banxico’s 25-basis-point rate cut on March 21.
- Fed Governor Christopher Waller delivered hawkish remarks on Wednesday, said that rates need to be higher for longer than expected and that more inflation progress is needed before supporting a rate cut. He sees the beginning of the easing cycle in 2024, though he suggests that back-to-back months of inflation data heading to 2% are needed.
- The GDP in the US rose by 3.4%, exceeding the preliminary reading of 3.2%, an indication of a strong economy. The Core Personal Consumption Expenditure (PCE) for Q4 2023 hit the Fed’s target of 2% QoQ.
- Initial Jobless Claims for the week ending March 23 rose to 210K, below market expectations of 215K and lower than the previous week. The data shows that the labor market remains tight, which could deter the Fed from cutting rates.
- The University of Michigan Consumer Sentiment index rose to its highest level since July 2021, climbing to 79.4, exceeding estimates of 76.5. Pending Home Sales recovered in February, increasing 1.6% MoM after plunging -4.7% in January and above the consensus of 1.5%.
Technical analysis: Mexican Peso is on the backfoot as USD/MXN edges toward the 16.60 region
The USD/MXN posted a reversal after dropping to a multi-year low of 16.51, with buyers emerging at around those levels, lifting the exchange rate to the 16.60 region. Nevertheless, they’re facing strong resistance at the previous year’s low of 16.62, which turned resistance. A breach of the latter will expose January’s monthly low of 16.78, followed by the March 19 high at 16.94. Up next would be the 50-day Simple Moving Average (SMA) at 16.97.
On the other hand, if the pair dives below 16.51, look for a test of October’s 2015 low of 16.32, ahead of the 16.00 psychological figure.
USD/MXN Price Action – Daily Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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