- Mexican Peso weakens, USD/MXN rises 0.36%, as markets anticipate Fed policy decision.
- Lowered expectations for Fed rate cut, Middle East tensions drive Peso down, Dollar up.
- Investors focus on Jerome Powell’s speech for clues on Fed’s future monetary policy direction.
The Mexican Peso (MXN) begins this week on the back foot for the third consecutive week against the US Dollar (USD) as traders remain cautious ahead of the US Federal Reserve’s (Fed) monetary policy decision. Investors reducing bets the Fed will cut rates in March, along with geopolitical tensions in the Middle East, keep risk-perceived currencies weak, boosting the safe-haven status of the Greenback. Therefore, the USD/MXN exchanges hands at 17.21, up 0.36%.
USD/MXN traders are bracing for the Fed’s decision on Wednesday. Expectations suggest the US central bank will keep rates on hold, and according to recent statements by some policymakers, discussions about quantitative tightening (QT) could emerge at the next meeting. However, market participants are looking to Fed Chairman Jerome Powell’s first appearance of the year on the stand. In December, Powell shifted more dovish, which was followed by Fed officials pushing back against aggressive speculation that the Fed would ease policy aggressively. Traders estimate that Powell will take a more balanced approach on Wednesday.
Daily Digest Market Movers: Mexican Peso to extend its weekly losses, ahead of Fed decision
- Ahead in the week, Mexico’s economic docket will reveal the Gross Domestic Product (GDP) preliminary reading for 2023’s last quarter, with estimates on a quarterly basis down at 0.3% from 1.1% in Q3. The consensus projects yearly figures down from 3.3% at 3%.
- The Mexican Peso could remain bullish as data suggests inflation remains above target even though underlying numbers slipped below the 5% threshold for the first time. That, along with the latest strong labor market report, indicates economic strength. With risks for inflation remaining tilted to the upside, that could prevent the Bank of Mexico (Banxico) from cutting rates.
- On the bearish front, two of Banxico’s Governors, one involving Governor Victoria Rodriguez Ceja, opened the door to ease policy in the first quarter of 2024, which could weigh on the Peso as the interest rate differential between Mexico and the US would shrink. The economy losing pace due to an upcoming slowdown in the US and geopolitical risks are a headwind for the Mexican currency.
- Last week’s data featured Mexico’s Trade Balance hitting a surplus in December, while Economic Activity shrank in November. On the data front, the Unemployment Rate dropped, signaling the labor market remains robust.
- On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.
- Across the border, the US economy remains resilient, as GDP in Q4 of last year crushed forecasts despite easing from Q3’s 4.9%. That could force Fed officials to refrain from easing policy, but the latest inflation data suggests they’re close to getting inflation to its 2% target.
- Nevertheless, mixed readings in other data suggest that risks have become more balanced. That is reflected by investors speculating that the Fed will cut rates by 139 basis points during 2024, according to the Chicago Board of Trade (CBOT) data.
Technical Analysis: Mexican Peso drops sharply as USD/MXN bounces off 50-day SMA
The USD/MXN price action on Monday has edged to the upside sharply with the risks of taking the bears out of the picture. A bullish engulfing chart pattern on the daily chart is putting the 200-day Simple Moving Average (SMA) at 17.34 back into play. Once that level is taken out, the 100-day SMA at 17.41 would be up next, followed by the December 9 high at 17.56, ahead of the May 23 high from last year at 17.99.
Conversely, if sellers step In, they must drag the USD/MXN exchange rate toward the 50-day SMA at 17.13. A decisive break will expose the January 22 low at 17.05, followed by the 17.00 psychological level.
USD/MXN Price Action – Daily Chart
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.
Title: Battle of the Currencies: Mexican Peso Fights Against Mighty US Dollar
Introduction:
Currencies play a significant role in global economies and their values are constantly fluctuating. In the dynamic world of foreign exchange, competition between currencies is fierce, with each country striving to have an advantage in the international market. One such battle is between the Mexican Peso (MXN) and the US Dollar (USD). While the USD continues to dominate the global market, the Mexican Peso has been fighting to establish its place and gain stability. In this article, we will dive deeper into the history, current state, and factors influencing this ongoing battle of the currencies.
The History of the Mexican Peso:
The Mexican Peso has a long-standing history, dating back to the Spanish conquest in the 16th century. It initially gained its value from the Spanish silver coins, known as the Real de a Onza, which was used as a common currency until Mexico gained independence in 1821. After gaining independence, Mexico adopted the Peso as its official currency and followed the silver standard until 1905 when it switched to the gold standard. In 1993, the Mexican government introduced a new currency, the New Peso, to combat hyperinflation. Finally, in 1996, it was rebranded as the current Mexican Peso, with the symbol $.
The Dominance and Role of the US Dollar:
For centuries, the US Dollar has been the primary global currency, backed by the largest economy in the world. It is the currency of choice for international trade, with approximately 60% of the world’s currency reserves held in US dollars. The US Dollar also plays a dominant role in the global oil market, with oil prices being quoted in US dollars. With its stable economy and political influence, the USD has served as a safe haven for investors during times of economic uncertainty.
Factors Influencing the Value of MXN and USD:
Several factors impact the value of MXN and USD. Let’s take a look at some of the key factors that affect the ongoing battle of these two currencies.
1. Inflation:
Inflation plays a crucial role in determining the value of a currency. Higher inflation rates lead to a decrease in the purchasing power of a currency, resulting in a decrease in its value. Mexico has been struggling with a high inflation rate for several years. In 2017, its inflation rate peaked at 6.77%, leading to a decline in the value of the MXN. On the other hand, the US has managed to maintain low and stable inflation rates, thereby increasing the value of the USD.
2. Economic Stability:
The stability of an economy is another significant factor affecting currency values. The US has a strong and stable economy, with a GDP of $21.4 trillion in 2019. In contrast, Mexico’s economy is smaller, with a GDP of $1.3 trillion in the same period. The continuous political and economic instability in Mexico has led to a lack of trust in its currency, resulting in a weaker value compared to the US dollar.
3. Trade Relations:
Another vital factor impacting the value of currencies is trade relations between countries. As Mexico’s largest trade partner, the US plays a crucial role in the value of the Mexican Peso. For example, changes in import and export policies, tariffs, and trade agreements between these two countries can significantly impact the value of the MXN and USD.
4. Interest Rates:
The interest rates set by central banks significantly affect the value of currencies. In June 2021, the US Federal Reserve announced an increase in interest rates, leading to a rise in the value of the USD. On the other hand, Mexico’s central bank has kept interest rates low in an attempt to stimulate economic growth, leading to a weaker MXN.
5. Geopolitical Factors:
Geopolitical events such as natural disasters, political unrest, or wars can also impact the value of currencies. In 2020, the COVID-19 pandemic caused a significant decline in the value of the Mexican Peso. At the same time, the US dollar remained relatively stable due to its perceived safe-haven status in uncertain times.
The Ongoing Battle of the Currencies:
Over the years, the Mexican Peso has been fighting to establish its place in the global market and challenge the dominance of the US Dollar. However, despite efforts to stabilize the MXN, it continues to face challenges such as high inflation rates, economic instability, and geopolitical factors. On the other hand, the US Dollar’s strong and stable economy, as well as its role as the global reserve currency, have allowed it to maintain its dominance.
The Effects on the US-Mexican Border:
The strength or weakness of the Mexican Peso has a direct impact on the US-Mexican border. A stronger MXN means cheaper imports for the US, while a weaker Peso makes US exports more expensive for Mexicans. Additionally, approximately 1 million US jobs are directly tied to trade with Mexico, further emphasizing the importance of this ongoing currency battle.
Practical Tips for Traders:
For traders and investors, keeping an eye on the value of the Mexican Peso and the US Dollar can provide valuable insights. Understanding the factors influencing their values can help make informed investment decisions. Additionally, diversifying portfolios with investments in both currencies can provide a hedge against currency fluctuations.
Conclusion:
The ongoing battle between the Mexican Peso and the US Dollar highlights the complexities and competition within the global market. While the US Dollar continues to dominate, the Mexican Peso is gradually making its mark with efforts to stabilize its economy and increase trade relations. As global economies continue to evolve, it will be interesting to see how this battle of the currencies unfolds in the years to come.
References:
– BBC News. (2021, June 16). US inflation: What is it and why does it matter? BBC News. https://www.bbc.com/news/business-57079865.
– Bank of Mexico. (2021). Exchange rates. Bank of Mexico. https://www.banxico.org.mx/tipcamb/main.do.
– Federal Reserve Bank of St. Louis. (2021). Real gross domestic product for Mexico [MEXRGDPRNA666NRUG]. Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/MEXRGDPRNA666NRUG.
– Forbes. (2021, June 4). The US dollar still dominates global currency markets, but the battle is on as markets, economies and technology shift. Forbes. https://www.forbes.com/sites/forbesmarketplace/2021/06/04/the-us-dollar-still-dominates-global-currency-markets-but-the-battle-is-on-as-markets-economies-and-technology-shift/?sh=1cc1a303c988.
– Trading Economics. (2021). Mexico inflation rate [MEXCPYOYNA661N]. Trading Economics. https://tradingeconomics.com/mexico/inflation-cpi.
– United States Department of Agriculture. (2020). United States-Mexico-Canada Agreement. https://www.usda.gov/topics/trade/united-states-mexico-canada-agreement.
