- Mexican Peso advances against the US Dollar, USD/MXN threatens 17.00 support area.
- Mexico’s economic docket ahead includes Retail Sales on Wednesday, followed by Thursday’s inflation data.
- US housing data was solid but failed to move the needle in favor of the US Dollar, which remains on the defensive.
The Mexican Peso (MXN) continues to strengthen against the US Dollar (USD) during the North American session on Tuesday, as the Greenback (USD) remains pressured despite US Federal Reserve (Fed) officials pushing back against aggressive bets suggesting the central bank would lower rates by more than 100 basis points next year. Therefore, the USD/MXN trades at 17.07, down 0.49% on the day, after reaching a new three-month low at around 17.02.
Mexico’s economic calendar remains scarce on Tuesday but will gather attention on Wednesday with the release of Mexican Retail Sales for October. On Thursday, the calendar will feature mid-month headline and underlying inflation data for December. Across the border, the solid housing data from the United States (US) did little to nothing to help the Greenback, which, according to the US Dollar Index (DXY), has dropped to a new two-day low of 102.10.
Daily digest market movers: Mexican Peso extends gains despite Banxico’s dovish comments
- US Housing Starts rose by 14.8% in November, smashing October’s 0.2% expansion, while Building Permits as a whole contracted at a 2.5% rate, trailing October’s 1.8% growth. Although the data was solid, it was ignored by market participants.
- Recent comments from the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja suggest the central bank would be cautious in setting monetary policy next year. She said they would remain data-dependent, and if the disinflation process continues, they could lower rates in the first quarter of 2024.
- Banxico’s Governor noted 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.
- In Banxico’s last meeting, the central bank unanimously voted to hold rates at 11.25% and revised its inflation forecast for some quarters of 2024 and 2025.
- Even though US business activity gathered traction in December, as revealed by S&P Global PMIs, the markets would face a reality check on December 21, with the release of the Gross Domestic Product (GDP) for the third quarter expected to remain at 5.2% QoQ, above Q2’s 2.1%.
- Richmond Fed President Thomas Barkin said that inflation remains the main focus for the Fed, acknowledging there’s progress on curbing elevated prices. He said the Fed’s forecasts are now guidance, just projections, and added that the Fed could re-focus on its dual mandate
- 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.
- As of today, money market futures estimate the Fed will slash rates by 134 basis points toward the end of next year, three basis points lower than December’s 18 and twice the Fed’s forecasts of three 25 bps cuts for 2024, according to the SEP.
Technical analysis: Mexican Peso threatens critical technical area
The USD/MXN is trading sideways though tilted to the downside, as the 100, 200, and 50-day Simple Moving Averages (SMAs) begin to converge toward the 17.41/58 area, almost shifting flat. The downtrend is gathering pace, accelerating toward the bottom of the 17.00-17.60 range. A daily close below 17.00 would exacerbate a leg-down toward the year-to-date (YTD) low of 16.62, ahead of the end of the year.
Otherwise, if bulls regain the 100-day SMA at 17.41, the USD/MXN could edge toward the 200-day SMA at 17.51 in route to the 50-day SMA at 17.56. Once those levels are surpassed, further upside lies at the psychological 18.00 figure.
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.