News & Analyses

Mexican Peso stumbles as US yields lift US Dollar higher, despite Banxico’s stance

  • Mexican Peso depreciates against US Dollar, late during the North American session.
  • Banxico’s decision to maintain the interest rate at 11.00%, sponsored the latest leg down on USD/MXN.
  • Bank of Mexico cited higher prices as reason to pause lowering rates.
  • US consumers become pessimistic on economy due to inflation, unemployment, interest rates.

The Mexican Peso erased its gains against the US Dollar, after the Bank of Mexico (Banxico) decided to keep rates at 11.00% due to a reacceleration of inflation. In the meantime, the University of Michigan (UoM) Consumer Sentiment deteriorated in May, weighing on the performance of the Greenback versus the Mexican currency. The USD/MXN trades at 16.78, up 0.08%

On Thursday, Banxico’s Governing Council decided to keep rates unchanged, citing the latest uptick in inflation. The bank said that even though the disinflation process is expected to continue, the central bank revised its inflation projection.

In its policy statement, Banxico noted, “Considering that inflationary shocks are foreseen to take longer to dissipate, the forecasts for headline and core inflation have been revised upwards for the next six quarters. In particular, services inflation is foreseen to show more persistence, as compared to what had been previously anticipated.”

The US economic docket revealed that American consumers became less optimistic about the economy. The University of Michigan survey said they’re concerned about inflation, unemployment and interest rates.

Recently, two Federal Reserve (Fed) officials made statements that have drawn attention. Fed Governor Michelle Bowman emphasized that the US central bank should act “carefully and deliberately” in its policy decisions. Meanwhile, her colleague, Lorie Logan of the Dallas Fed, expressed that it is too early to consider cutting interest rates.

Next week, the US docket will feature the release of inflation figures, retail sales, building permits and Fed speeches.

Daily digest market movers: Mexico’s high inflation prompted Banxico to hold rates flat

  • Banxico unanimously decided to keep rates at 11.00% due to recent data signaling that inflation is accelerating.
  • The central bank revised its estimates that inflation would converge toward its 3% goal until the last quarter of 2025, later than March’s estimates for Q2 2025. Core inflation is projected to hit 3% in Q2 2025.
  • April’s data show that Mexico’s headline inflation is reaccelerating. However, core prices are falling.
  • The UoM Consumer Sentiment Index retreated in May from 77.2 in April to 67.4, missing analysts’ estimates of 76. According to Joanne Hsu, Director of the UoM Survey, the 10-point decline “is statistically significant and brings sentiment to its lowest reading in about six months.”
  • Inflation expectations for one year rose from 3.2% to 3.5% in May. For a 10-year period, they increased to 3.1%, a tenth up from 3.0%.
  • US labor market continues to cool. April’s Nonfarm Payrolls and the release of the latest unemployment claims data can put pressure on Fed officials, who acknowledged that risks to achieving its dual mandate on employment and inflation “moved toward better balance over the past year.”
  • Data from the futures market show odds for a quarter-percentage-point Fed rate cut in September at 74% versus 85% ahead of the UoM Consumer Sentiment report.

Technical analysis: Mexican Peso gains traction as USD/MXN tumbles below 16.80

The USD/MXN downtrend remains intact as the Peso’s strength drives the pair lower. Momentum favors sellers as the Relative Strength Index (RSI) remains in bearish territory, suggesting that lower prices are expected.

If the USD/MXN remains below the 50-day Simple Moving Average (SMA) of 16.79, that could pave the way for additional losses. The next support will be the 2023 low of 16.62, followed by the current year-to-date low of 16.25.

On the other hand, if buyers claim the 100-day SMA at 16.92, that could sponsor a leg up to the 17.00 psychological level. A breach of the latter would expose the 200-day SMA at 17.17, followed by the January 23 swing high of 17.38 and the year-to-date high of 17.92.

Mexican Peso FAQs

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.

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.

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.

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.


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