- Mexican peso gains amid weak US dollar and reduced trade concerns, shrugging off mixed Mexican economic activity data.
- Inflation falls mid-month to 3.69% y/y, close to Panseco’s 3% target, supporting Dovish’s policy.
- Trump’s moderate comments on Mexico at WEF reduce trade concerns; Key GDP and trade data forecast.
The Mexican Peso (MXN) rose in early trading during the North American session as mixed economic growth numbers emerged in Mexico, although a weak US Dollar (USD) kept PESO up. At the time of writing, USD/MXN is trading at 20.16, down 1%.
The Instituto Nacional de stadistica geografia e Informatica (Inegi) revealed that economic activity in November improved month-on-month but not year-on-year. With more than 2.70% gains, the Mexican currency is set to post its best weekly performance since September 2024.
President of the United States (US) Donald Trump toned down his comments about Mexico and delivered upbeat remarks about the country at the World Economic Forum (WEF), which eased trade policy concerns and sponsored a leg up on USD/MXN.
Meanwhile, inflation fell in mid-January towards the Banco de Mexico (BANSECO) target of 3%. The Consumer Price Index (CPI) rose 3.69% year-on-year, from 4.44% reported in December, while the core CPI rose moderately from 3.62% to 3.72% year-on-year.
In the US, S&P Global revealed that manufacturing activity has emerged from contraction territory but failed to consolidate the Greenback. Meanwhile, consumer sentiment revealed by the University of Michigan (UOM) deteriorated compared to preliminary ratings, while housing data improved through existing home sales.
Mexico’s economy has continued to cool, and is expected to grow just 1% in 2025. The slowdown has benefited the inflationary process and supports Panseco’s position.
The Federal Reserve (FED) is expected to keep rates unchanged. The Board’s main reasons for this decision are the strength of the US economy, as depicted by healthy economic growth, a strong labor market and more pressing inflation numbers.
Next week, Mexico’s economic calendar will show trade balance, jobs data and the preliminary reading of gross domestic product (GDP) for the fourth quarter of 2024.
Daily Digest Market Movers: Mexican Peso Climbs amid Mixed Economic Activity Figures
- The Mexican peso advances against the US dollar although the lowest inflation figures suggest Panseco will cut rates. On the contrary, the Fed is expected to keep monetary policy unchanged and wait for the March meeting.
- Inegi revealed that economic activity for November improved from -0.7% to 0.4% mom. In the twelve-month period, the numbers fell from 0.8% to 0.5%, missing the expected 0.6%.
- CITI revealed its forecast survey, with Mexican economists downgrading gross domestic product (GDP) figures for 2025 to 1%.
- Regarding inflation expectations, analysts estimate headline and core inflation to fall below 4%, each at 3.91% and 3.68%, while the exchange rate will likely end up near 20.95.
- Economists estimate that Banco de Mexico (Banxico) will cut rates by 25 basis points (BPS) from 10.00% to 9.75%, although some analysts expect a 50-point cut at the meeting on February 6.
- The S&P Global US Manufacturing CIO for December increased by 50.1 from 49.4, beating expectations. Meanwhile, the Services PMI deteriorated from 56.8 to 52.8.
- Money market futures are priced in at 45 basis points of interest rate cuts in 2025, according to data from the FedWatch CME tool.
USD/MXN Technical Forecast: Mexican Peso rallies as USD/MXN falls below 20.30
USD/MXN falls below the 50-day simple moving average (SMA) of 20.37 and extends losses towards the 100-day SMA of 20.22, but the Bears failed to push prices below the latter, consolidating near the midpoint Range 20.20 – 20.30.
The momentum has turned bearish as depicted by the Relative Strength Index (RSI). So if USD/MXN falls below 20.20, the next support will be 20.00. On further weakness, the next support will be the November 7 swing low of 19.75, before the October 18 swing low of 19.64.
Conversely, for a bullish resumption, USD/MXN must climb above 20.55, so buyers have a clear path to challenge a general rise (YTD) at 20.90. Once passed, the next stop will be 21.00, followed by March 8, 2022, where it peaks at 21.46 before the 22.00 figure.
Panseco Frequently Asked Questions
The Bank of Mexico, also known as Banseco, is the country’s central bank. Its mission is to maintain the value of Mexico’s currency, the Mexican peso (MXN), and to adjust 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 of the tolerance range of 2% to 4%.
The Bank’s main tool for directing monetary policy is setting interest rates. When inflation is above target, the bank will try 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 a positive for the Mexican Peso (MXN) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken MXN. The rate difference with the US dollar, or how Banxico is expected to set interest rates compared to the US Federal Reserve (FED), is a key factor.
Panseco meets eight times a year, and its monetary policy is greatly influenced by the decisions of the US Federal Reserve (FED). Therefore, the central bank’s decision-making committee usually meets a week after the Fed. In doing so, Panseco sometimes reacts to and anticipates monetary policy measures put in place by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed rate hiked, Panseco first made an attempt to reduce the chances of a significant decline in the Mexican peso (MXN) and to prevent capital outflows that could destabilize the country.
