Mexican Peso remains firm against the US Dollar despite high US bond yields

  • Mexican Peso drops amid the lack of economic data, but remains inside the 17.00/17.60 range.
  • Banxico to remain cautious despite easing policy for the next year commented its Governor Rodriguez Ceja.
  • Federal Reserve officials pushed back against aggressive bets suggesting the central bank would cut rates twice its projections.

The Mexican Peso (MXN) stages a comeback against the US Dollar (USD), and is virtually unchanged, registering minuscule gains of 0.04%, despite dovish comments from the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja crossing the newswires. In the meantime, Federal Reserve (Fed) officials pushed against aggressive rate cuts bets by the market, which expects more than 140 basis points of easing. At the time of writing, the USD/MXN is trading at 17.17, down after hitting a daily high of 17.29.

Mexico’s economic docket remains scarce, though Banxico’s Governor Rodriguez Ceja grabbed the headlines. She commented that inflation has fallen, but they remain cautious about when beginning to ease monetary policy. She added that they’re anticipating cutting rates “gradually.”

Daily digest market movers: Mexican Peso on the defensive amidst Banxico’s dovish comments

  • Banxico’s Governor Victoria Rodriguez Ceja noted that if data supports the disinflationary process, they could ease monetary policy in the first quarter of 2024.
  • Bank of Mexico’s Governor added that despite reviewing their inflation projections for 2024, the central bank kept its forecast of inflation returning to its 3% target in 2025.
  • Lastly, Victoria Rodriguez Ceja added the Governing Council considers several factors when determining its policy, including the exchange rate, though they’re not focused on a specific level.
  • Banxico’s decision to keep rates unchanged last week was unanimously supported by its five members.
  • The central bank acknowledged that inflation risks are tilted to the upside after November’s report witnessed headline inflation rising due to the “rise in non-core components” while core inflation eased.
  • Banxico revised its inflation projections for some quarters of 2024 and 2025.
  • US business activity picked up in December, according to S&P Global. The composite index, which combines manufacturing and services sectors, increased to 51, exceeding November’s 50.7 and hitting a five-month high.
  • Federal Reserve official Raphael Bostic projects two rate cuts next year and a soft landing. Nevertheless, he added the US central bank must be resolute, and that rate cuts are not imminent.
  • Aside from this, the New York Fed President John Williams pushed back against the idea of rate cuts, emphatically saying it’s “premature” to think about easing policy in March.
  • Williams added that the question around the Fed board is whether the policy is sufficiently restrictive enough to ensure inflation returns to 2%.
  • According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rates (FFR) to 4.60% in 2024, though they remain data-dependent.
  • The fall in US Treasury bond yields, which are closely correlated to the Greenback (USD), has stalled, easing the pressure on the USD. The US Dollar Index (DXY) is virtually unchanged, falls 0.02%, up at 102.57.
  • Money market futures estimate the Fed will slash rates by 140 basis points toward the end of next year, twice the Fed’s forecasts of three 25 bps cuts.

Technical analysis: Mexican Peso to remain rangebound at around 17.00-17.60

The USD/MXN is rangebound as the 100, 200, and 50-day Simple Moving Averages (SMAs) begin to converge toward the 17.41/58 area, almost shifting flat. As long as the exchange rate remains below them, it would remain slightly tilted to the downside, with the first support level seen at last week’s low of 17.14, ahead of dropping toward the 17.00/05 area.

On the other hand, if buyers reclaim the 100-day SMA at 17.41, the USD/MXN could rally toward the 200-day SMA at 17.51 in route to the 50-day SMA at 17.58. Once those levels are surpassed, further upside lies at the psychological 18.00 figure.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Source: https://www.fxstreet.com/news/mexican-peso-weakens-as-banxicos-governor-opens-the-door-to-rate-cuts-202312181607