- Mexican Peso appreciates as US November inflation data meets estimates, favoring Fed’s easing.
- Mexico’s inflation continues to edge lower, enhancing prospects for a bigger Banxico rate cut.
- Investors anticipate a 25 bps rate cut by the Federal Reserve on December 18 with odds standing at 92%.
The Mexican Peso extended its gains on Wednesday after US economic data showed that November inflation was aligned with estimates, cementing the case for an interest rate cut by the Federal Reserve (Fed). Consequently, the US Dollar weakened and weighed on the USD/MXN, which traded at 20.11, down over 0.24%.
On Wednesday, US headline and core inflation prints in November were as expected. After the US Consumer Price Index (CPI) release, traders priced in a 92% chance that the Fed would lower interest rates by 25 basis points (bps) on December 18.
US Treasury yields edged lower, while the USD/MXN tumbled beneath 20.20, extending its losses as the Peso appreciated against the Greenback.
Mexico’s economic docket remains scarce on Wednesday, but traders had already digested the release of softer than expected Mexican CPI figures in November. Prior in the week the CPI showed that the disinflation process continues to evolve as headline inflation dipped from 4.76% to 4.55%, while underlying inflation dropped from 3.80% to 3.58%.
Following the data, JPMorgan hinted that the Bank of Mexico (Banxico) might lower rates by 50 basis points (bps), as inflation data shows that prices are edging lower faster than expected. “It is true that if there is a window of opportunity to deliver a 50bp rate cut and recalibrate policy to a less restrictive stance, it is now,” analysts wrote in their note on Monday.
This week, Mexico’s schedule will feature October’s Industrial Production data. In the US, the docket will reveal the Producer Price Index (PPI) for November on Thursday, alongside Initial Jobless Claims for the week ending December 7.
Daily digest market movers: Mexican Peso extends losses below 20.20
- Mexico’s Industrial Production is expected to contract -0.2% MoM in October, down from 0.6% in September. On an annual basis, the economists project production to drop from -0.4% to -0.6% YoY.
- The swaps market suggests Banxico will cut interest rates by 25 basis points at the December 19 meeting.
- US Treasury bond yields slipped with the 10-year T-note coupon diving to a low of 4.201% before recovering to 4.26%, up three basis points.
- The US Dollar Index rises by 0.24% to 106.63.
- Banxico’s Governor, Victoria Rodriguez Ceja, remains dovish. In her last interview with Reuters, she said that given the progress of disinflation, the central bank could continue lowering borrowing costs.
Mexican Peso technical outlook: USD/MXN stumbles below 20.15 on strong Peso
The USD/MXN remains downwardly biased after clearing the 20.20 figure but remains shy of clearing the 50-day Simple Moving Average (SMA) of 20.03.
Momentum, as measured by the Relative Strength Index (RSI), suggests that sellers are in charge. This means that further USD/MXN downside is expected.
If USD/MXN drops below the 50-day SMA, the next support would be 20.00. A breach of the latter will expose the 100-day SMA at 19.66, followed by the psychological 19.50 figure. Once surpassed, the next stop would be the 19.00 mark.
Conversely, if USD/MXN soars above the December 6 high of 20.28, that could pave the way to challenge 20.50, ahead of the year-to-date peak at 20.82, followed by the 21.00 mark.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
