Mexican Peso surges in anticipation of upcoming Fed meeting, post soft US CPI data

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  • Mexican Peso surpasses the 100-day SMA, prints two-day high.
  • Mexico’s Industrial Production crushed the forecast, ahead of Banxico’s decision on Thursday.
  • The Fed is expected to hold rates unchanged, but uncertainty looms about Powell’s speech.

Mexican Peso (MXN) stages a comeback climb against the US Dollar (USD) following an inflation report in the United States (US), which most likely would prevent the US Federal Reserve (Fed) from easing monetary policy faster than the expectations of market participants. At the time of writing, he USD/MXN is trading at 17.33, losing 0.26% after reaching a daily high of 17.43

Mexico´s calendar revealed that Industrial Production in October exceeded September’s data, suggesting the economy remained robust at the beginning of Q4 2023. Across the border, the US Bureau of Labor Statistics (BLS) announced that the disinflation process continued as traders brace for the Fed’s decision on Wednesday.

The Fed is not only expected to reveal its monetary policy decision but also the Summary of Economic Projections (SEP) after its meeting on Wednesday. On the day after, the Bank of Mexico (Banxico) is set to announce its own policy decision. Both central banks are expected to hold rates unchanged – at 5.25% – 5.50% in the case of the Fed, and 11.25% for Banxico.

Daily digest movers: Mexican Peso counterattacks as the USD/MXN slides further below 100-day SMA

  • Industrial Production in Mexico was 5.5% in the twelve months ending in October, above September’s 3.9%. Monthly figures advanced 0.6% vs. 0.2% in the previous month.
  • Mexico’s inflation data was mixed, though the disinflation process continued, as Banxico had estimated. Two officials, Governor Victoria Rodriguez Ceja and Deputy Governor Jonathan Heath, expressed that rate-cut discussions could begin in the first quarter of 2024.
  • The US Consumer Price Index (CPI) for November was aligned with estimates of 3.1% YoY, lower than October’s 3.2%, with monthly readings rising 0.1%, above forecasts of 0%.
  • The CPI excluding food and energy, the so-called core, stood pat at 4%, and month-over-month, at 0.3%, which aligned with forecasts, and was a tick higher than October’s 0.2%.
  • Now that inflation data is out of the way and given the strengthening revealed in the US labor market by recent data, expectations of the Fed’s interest rate expectations for the next year remain volatile. Data from the Chicago Board of Trade (CBOT) has traders expecting 100 bps of rate cuts.
  • On Wednesday, USD/MXN traders will scrutinize the Fed’s statement, its Summary of Economic Projections (SEP), and Chair Jerome Powell's speech. Powell is expected to push back against market speculation of monetary policy easing for next year.
  • The US Dollar Index (DXY) pared some of its losses, with the DXY down 0.07% at 104.01.

Technical analysis: Mexican Peso gathers momentum prints a two-day high around 17.29

The USD/MXN daily chart portrays the pair as neutral to upward biased, with buyers battling at the 100-day Simple Moving Average (SMA), seen as a resistance level at 17.40. If they want to regain control, a breach of the latter is needed, followed by the 17.50 mark. Upside risks will surface at the 200-day SMA at 17.54, followed by the 50-day SMA at 17.65

On the other hand, failure to reclaim the 100-day SMA, could see sellers pile in and drag prices toward the 17.20 area, ahead of a strong demand region at around the 17.00/05 range. Once hurdled, the USD/MXN could test the year-to-date (YTD) low of 16.62.

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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