- Mexican Peso depreciates over 0.80% as traders eye Fed’s first rate cut in four years.
- Fed lowers rates by 50 bps, yet the USD/MXN holds to earlier gains.
- Mixed Q2 data in Mexico and concerns over judicial reform may reduce investment attractiveness, adding to Peso volatility.
The Mexican Peso edged lower against the US Dollar during the North American session on Wednesday, dropping over 0.80% after the Federal Open Market Committee (FOMC decided to lower borrowing costs by 50 basis points Data from Mexico was mixed, though it failed to boost the Mexican currency. At the time of writing, the USD/MXN trades at 19.26 after hitting a low of 19.06.
Federal Reserve policymakers decided to lower borrowing costs as they grew confident that inflation is moving “sustainably” toward the bank’s 2% target. However, they acknowledged that the dual mandate of price stability and maximum employment is now roughly balanced while noting that the economic outlook remains uncertain.
The Fed’s decision was not unanimous as Governor Michelle Bowman dissented in the vote, favoring a smaller rate cut of a quarter percentage point.
The Summary of Economic Projections (SEP) shows the US central bank estimated interest rates to end at 4.4% in 2024 and 3.4% in 2025. Inflation, as measured by the Core Personal Consumption Expenditures Price Index (PCE), is projected to reach the Fed’s 2% target by 2026, though it’s estimated to end at 2.6% in 2024 and 2.2% in 2025.
Fed officials also project the economy will grow at a 2% pace in 2024, with the Unemployment Rate rising to 4.4% by the end of the year.
During his press conference, Fed Chairman Jerome Powell stated that inflation risks have diminished and reaffirmed that the economy remains strong. He noted that if inflation persists, “we can dial back policy more slowly” and emphasized that the SEP indicates the Committee is not in a rush to normalize policy.
Even though the USD/MXN edged slightly lower after the FOMC’s decision, buyers stepped in and pushed the exotic pair toward current exchange rates. Meanwhile, eyes are on the Bank of Mexico (Banxico), which is expected to lower rates by 0.25% at the September 26 monetary policy meeting decision.
In the meantime, Victor Manuel Herrera, President of Instituto Mexicano de Ejecutivos de Finanzas (IMEF), commented that the judicial reform and the disappearance of autonomous organizations might affect the economy in Mexico and reduce investment attractiveness, given the phenomenon of companies relocating from the US.
Daily digest market movers: Mexican Peso weighed down by weak Mexican data, Fed decision
- USD/MXN would continue to be driven by market mood and expectations for a bigger Fed rate cut.
- Mexico’s Aggregate Demand in Q2 shrank -0.4%, below the previous reading of 1.2%. Private Spending in the second quarter plunged by 0.6% and trailed Q1’s expansion by 1.8%.
- US Building Permits in August grew by 4.9% MoM from 1.406 million to 1.475 million.
- Housing Starts expanded by 9.6% and rose from 1.237 million to 1.356 million.
USD/MXN technical outlook: Mexican Peso falls as USD/MXN holds gains above 19.30
The USD/MXN uptrend remains intact, though the FOMC’s decision could rock the boat sharply and increase volatility. Momentum hints that bulls are gathering steam, as shown by the Relative Strength Index (RSI).
If USD/MXN climbs above 19.50, the next resistance would be the 20.00 psychological level. Further upside emerges at the yearly peak at 20.22, followed by the 20.50 mark.
Conversely, if USD/MXN drops below 19.15, key support levels emerge, like the August 23 daily low of 19.02, ahead of the 50-day Simple Moving Average (SMA) at 18.99.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
