Mexican Peso erases its earlier gains ahead of next week Mexico’s inflation data

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  • Mexican Peso's advance against the US Dollar halts, with USD/MXN bouncing from recent lows despite broad-based USD weakness.
  • Banxico officials hint at a less restrictive monetary policy yet suggest gradual rate cuts.
  • Upbeat US economic data and Federal Reserve officials' resistance to early rate cuts propelled the USD/MXN up move.

Mexican Peso (MXN) trims some of its weekly gains against the US Dollar (USD) even though the stock market in the United States (US) portrays a risk-on mood.  Investors are pricing the Federal Reserve (Fed) to cut rates for the first half of 2024, though it failed to weigh on the Greenback (USD), as the USD/MXN jumps late in the New York session, gained some 0.08%, trades at 17.23, after hitting a two-month low at 17.18.

Mexico's economic docket remained scarce, though comments from Bank of Mexico (Banxico) officials suggest monetary policy would be less restrictive next year. Banxico Deputy Governor Jonathan said that despite cutting rates “gradually,” policy would continue to be restrictive. Governor Victoria Rodriguez Ceja said that monetary policy would be adjusted based on “macroeconomic conditions,” disregarding a cut through the remainder of 2023.

Next week, the Mexican economic docket will feature Retail Sales mid-month Inflation alongside Gross Domestic Product (GDP) data for the third quarter. On the US front, the releases of the latest Fed meeting minutes, Durable Goods Orders, unemployment claims, and Flash PMIs would offer fresh impetus for USD/MXN traders.

Daily digest movers: Mexican Peso advancement halts after printing five straight days of gains

  • US Building Permits in October came at 1.487 million, a jump of 1.1%, beating estimates of 1.45 million.
  • US Housing Starts for October increased 1.9% to 1.37 million, the highest in three months, above forecasts of 1.35 million.
  • On Friday, San Francisco Fed President Mary Daly said the Fed is uncertain if inflation is on track to 2%, and it’s too soon to declare victory on inflation. Fed Governor Michael Barr said the Fed is likely at or near the peak needed to be on interest rates.
  • Thursday’s economic data in the US suggests the economy is decelerating as expected by the Federal Reserve, after Industrial Production plunged in October, while unemployment claims have risen the most since August.
  • The US Producer Price Index and Consumer Price Index reports in October suggest prices are cooling down, increasing the odds of ending the US Federal Reserve tightening cycle.
  • Interest rates swap traders expect 100 basis points of rate cuts by the Fed in 2024.
  • Banxico’s Deputy Governor Jonathan Heath said the Government Board continues to monitor real rates, which currently lie at around 7%.
  • Heath said Banxico wouldn’t rely on other countries – usually, Banxico reacts to the US Federal Reserve’s decisions – and said they would depend on incoming data and how inflation expectations evolve.
  • On Monday, Banxico’s Governor Victoria Rodriguez Ceja commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
  • The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
  • Mexico’s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
  • Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bnk’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso is on a mission to strengthen further as USD/MXN sellers’ eye 17.00

The USD/MXN daily chart depicts the downtrend remains intact, though a break above the 100-day Simple Moving Average (SMA) at 17.34 could pave the way to 17.50. However, the breach of the latest cycle low printed on November 3 at 17.28 opened the door for further losses, with the next demand area at 17.20, ahead of the 17.00 figure.

On the flip side,  in case of a clear break of key resistance levels at 17.34 and 17.50, the USD/MXN could challenge the 200-day SMA at 17.63, ahead of the 50-day SMA at 17.69. Once cleared, the next resistance emerges at the 20-day SMA at 17.87 before buyers could lift the spot price towards the 18.00 figure.

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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