Mexican Peso hits four-month highs against the US Dollar

Mexican Peso soars as mixed economic data from the United States, undermined the Greenback.
Mexico’s Consumer Confidence deteriorates as households are concerned about the future economic outlook.
USD/MXN tumbles toward 16.80 as sellers eye 2023’s low of 16.62.

The Mexican Peso (MXN) post decent daily gains of 0.31% against the US Dollar (USD) following last week’s US employment report and a light economic docket in Mexico. The USD/MXN continues to trade at around 16.82, at multi-month lows.

On Monday, data showed Mexico’s Consumer Confidence deteriorated in December, according to the National Statistics Agency known as INEGI. Across the border, last Friday’s Nonfarm Payrolls report for December depicted the labor market is in better shape than estimated. Nevertheless, in the near term, hiring could begin to slow down as business activity reported by the Institute for Supply Management (ISM) showed the Manufacturing PMI stood in recessionary territory, while the Services PMI clung to 50.7, at the brisk of turning contractionary.

Daily digest market movers: Mexican Peso remains firm, extending its gains against the US Dollar

Mexico’s Consumer Confidence in December dropped slightly from 47.3 to 46.8 as consumers became more worried about the future economic outlook amongst households. In regard to the country’s outlook, consumers expect an economic slowdown, tough current conditions, sales of durable goods are expected to take a hit, as the poll showed.
Last week’s economic data in the US was mixed. Although the economy added 216K jobs, exceeding forecasts, usually, it’s the latest piece of data that feels the pain of monetary policy tightening. Contrarily, the ISM Manufacturing and Services PMI usually lead the economy, and even though the Services PMI stood at expansionary territory, it is slowing faster than expected.
On Saturday, the President of the Dallas Federal Reserve Bank, Lorie Logan, said the Fed shouldn’t rule out another rate hike due to the recent easing in financial conditions. She added the US central bank should consider the slow the pace of its balance sheet reduction.
The recent meeting minutes from Banxico (the Central Bank of Mexico) indicate that the institution might start considering the relaxation of its monetary policy, albeit cautiously. Four members of the Governing Council emphasized the importance of being prudent in both evaluating and communicating any decisions regarding rate reductions. Meanwhile, one member voiced the opinion that it might be time to start discussing potential rate cuts.
Last Tuesday, Mexico’s S&P Global Manufacturing PMI for December came out at 52.0, below November’s 52.5, suggesting the economy is slowing down amid Banxico’s tightening cycle.
On Wednesday, Business Confidence in Mexico improved to 54.6 from 54.0 in November, although it failed to underpin the Mexican Peso, which remained weak during the session.

Technical analysis: Mexican Peso buyers remain in charge as the USD/MXN drifts lower

The USD/MXN resumed its downtrend, and it’s accelerating its pace toward testing last year’s low of 16.62. A breach of the 16.80 area would expose the 16.69 August 28 swing low, followed by the 2023 low of 16.62.

On the flip side, if sentiment shifts bullish on the US Dollar, the exotic pair could reclaim the 17.00 figure, followed by the 17.05 mark. Once those two resistance levels are surpassed, up next would be 17.20, followed by the convergence of the 50, 100, and 200-day Simple Moving Averages (SMAs) at the 17.29/41 area.

USD/MXN Price Action - Daily Chart

Mexican Peso FAQs

What key factors drive the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

How do decisions of the Banxico impact the Mexican Peso?

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.

How does economic data influence the value of the Mexican Peso?

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

How does broader risk sentiment impact the Mexican Peso?

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.