On Friday, the Mexican Peso made significant strides against the US Dollar, even as analysts digested lackluster data suggesting a potential slowdown in Mexico’s economy. The Mexican currency managed to gain ground as consumer sentiment in the United States took a hit, pushing the USD on the backfoot. By the end of the trading day, USD/MXN was trading at 19.86, marking a drop of over 1%.
The mood in the market turned optimistic, benefiting emerging market currencies like the Peso. Despite grim reports like the dip in Mexico’s Consumer Confidence and Industrial Production, the Peso rose, bolstered by the broader weakening of the US Dollar. Alejandrina Salcedo Cisneros, Banco de Mexico’s Director of Economic Research, noted the prevailing uncertainty impacting businesses in Mexico and forecasted moderate economic growth around various regions. Indeed, Banxico predicted an economic shrinkage across the nation, with Q4 growth slipping by 0.6% from the previous quarter, as per seasonally-adjusted figures.
In the US, things weren’t looking much brighter. The University of Michigan released a rather disappointing Consumer Sentiment Index, while inflation worries climbed as tariffs loomed under President Trump’s policies.
Investors are now keenly watching the Federal Reserve’s upcoming policy announcement. Recently, Fed Chair Jerome Powell mentioned that “market measures of inflation expectations have risen,” attributing this shift to tariffs. Next week will be pivotal with data releases on Retail Sales, housing, and the Fed’s economic projections on the docket.
Daily market drivers highlight the Mexican Peso’s ascent against a weakening Dollar. Despite Mexico’s Industrial Production sinking by 2.9% year-on-year and deteriorating Consumer Confidence leave shadowing future gains for the Peso, driven mostly by global currency dynamics. As predicted by analysts consulted by Banxico, Mexico’s economic growth is anticipated to slow sharply, with a forecast at just 0.81%. Banxico appears all set to keep easing policy at the end of March amidst an ongoing disinflation trend and stagnant economy.
Mexican Finance Minister Edgar Amador Zamora acknowledged that even though the national economy is showing expansion signs, it’s slowing down, partly due to trade tensions with the US. The University of Michigan (UoM) informed that in March, consumer sentiment fell from 64.7 to 57.9, under the expected 63.1. Notably, Americans anticipated a rise in inflation, from 4.3% to 4.9% for the year ahead, with long-term expectations also edging higher. Meanwhile, futures markets currently price in fewer basis points of easing by the Fed by year-end, compared to figures from just a couple of days ago.
A Reuters survey reveals that 70 out of 74 economists see increasing recession risks for the US, Canada, and Mexico, fueled largely by ongoing trade disputes. An agreement between the US and Mexico could invigorate the Peso, while unresolved disputes might herald further gains for the USD/MXN pair, particularly if tariffs nudge Mexico toward recession.
From a technical standpoint, USD/MXN finally broke below the 20.00 level, bottoming out at 19.84 during North American trading hours. Indicators like the Relative Strength Index (RSI) suggested a bearish trajectory, hinting at further dips. Key support for USD/MXN lies at the 200-day Simple Moving Average (SMA) around 19.67; if this is surpassed, the pair might target 19.50. Looking upwards, resistance is immediately at 20.00, with a convincing break potentially testing the 100-day SMA at 20.35.
Turning to the Mexican central bank, known as Banxico, its primary mission is maintaining the value of the Peso by controlling inflation, which it aims to keep within a target band of 2% to 4%. To steer monetary policy, Banxico adjusts interest rates. When inflation exceeds targets, raising rates becomes a tool to curb borrowing and slow down economic activity, which in turn often strengthens the Peso. Conversely, lower rates tend to weaken it. The rate differential between Banxico and the US Federal Reserve is a key dynamic in this realm.
Banxico convenes eight times annually, often following the Fed’s lead, allowing them to resonate or anticipate US monetary policies. For instance, during the Covid-19 pandemic, Banxico moved to raise interest rates ahead of the Fed to stave off a potential deep depreciation of the Peso and mitigate capital flight, thus safeguarding economic stability.
