The Mexican Peso has recently shown signs of vulnerability, trading sideways near three-week lows. Investors are keenly awaiting the Bank of Mexico’s (Banxico) upcoming monetary policy decision, which is anticipated to have substantial implications for the currency’s trajectory. This comes in the wake of a notable shift in U.S. monetary policy, which has recalibrated expectations and created a ripple effect across emerging market currencies including the Peso.
The U.S. Federal Reserve’s recent “hawkish cut” was a pivotal moment for financial markets. By reducing interest rates by 25 basis points, the Fed simultaneously expressed confidence in the overall strength of the U.S. economy. This dual move has propelled the U.S. Dollar to new heights, reinforcing bullish momentum in currency pairs involving the Dollar. The USD/MXN exchange rate is currently showing strength above the 20.30 mark, aligning with a broader trend of increasing bullish sentiment.
Market dynamics are increasingly influenced by interest rate expectations set forth by central banks. In the United States, the Fed not only cut rates but also raised its projections for interest rates in 2025, shifting from an anticipated 3.4% to 3.9%. This has signaled expectations for additional rate cuts next year, which alters the risk profile for investors and market participants globally. The current projections indicate a resilient economic stance, as the Fed lifted its inflation expectations to 2.5% for 2025, a move that suggests policymakers are bracing for potential inflationary pressures, notably from incoming economic policies under the new presidential administration.
On the Mexican side, Banxico is widely expected to cut rates by 25 basis points to 10% soon. If executed, this will mark the fifth rate cut of 2023 alone, with analysts predicting further reductions moving into 2025. The interplay between the U.S. Fed’s aggressive stance and Banxico’s easing measures may serve to widen the interest rate differential, potentially triggering further depreciation of the Peso.
Recent economic data out of Mexico has not bolstered confidence in the Peso. Retail sales fell unexpectedly by 0.3% in October, defying estimates for modest growth. Although the yearly decline in retail consumption moderated, indicators suggest a less-than-optimistic outlook for consumer spending. Market analysts, relying on a Citi survey, foresee the Peso depreciating to around 21.00 against the U.S. Dollar by next year, alongside predictions of an economic slowdown in Mexico, with growth rates anticipated at 1.6% for 2024 and further declining to 1.2% in 2025.
This economic backdrop raises concerns about inflationary pressures and consumer sentiment, which are critical to the overall health of the economy. Investors are likely to respond to such signals by reassessing their holdings in Mexican financial instruments, creating a degree of risk aversion that can further drive the Peso lower against a resurgent Dollar.
From a technical perspective, the USD/MXN currency pair has broken above the top of a two-week horizontal channel, indicating a robust consolidation above the 20.30 figure. This technical movement places the 20.60 resistance level in sight for upcoming sessions. With bullish momentum illustrated through Relative Strength Index (RSI) measurements, the sentiment remains decidedly positive for the U.S. Dollar.
Investors and analysts are carefully monitoring the situation, particularly as support levels establish themselves at critical points, including the recent channel top at 20.30 and the psychologically significant level of 20.00. How the Peso responds to both domestic economic data and foreign monetary policy decisions will be pivotal for its future trajectory.
The convergence of U.S. monetary policy adjustments and Mexican economic conditions presents a complex backdrop for the Peso. Ongoing developments with Banxico’s rate decision, coupled with influential economic metrics, will play a crucial role in shaping market predictions as we move toward 2024.