Mexican Peso Climbs, But Fed-Banco Mexicana Rate Difference Threatens Its Appreciation.
US Producer Prices Rise, Pushing Back Fed Rate Cut Expectations to September.
USD/MXN Loses as Dollar Index Falls 0.55%, But Policy Divergence Looms.
The Mexican Peso (MXN) edged higher against the US Dollar (USD) on Thursday as further inflation data showed that prices in the United States (US) remain above the Federal Reserve’s (Fed) 2% target. In addition, expectations that US President Donald Trump will sign an executive order on reciprocal tariffs later in the day boosted the dollar, paring some of its losses against emerging market currencies. USD/MXN traded at 20.50, down 0.04%.
The latest round of US inflation data showed that producer prices rose in January, with the consumer price index (CPI) released a day earlier also showing rising prices. Meanwhile, the market expects the Federal Reserve to cut interest rates by 35 basis points (bps), with traders pushing back the first rate cut from June to September.
Meanwhile, data from the US Bureau of Labor Statistics (BLS) showed that the labor market remains strong, with fewer people applying for unemployment benefits in the United States in the week ending February 8.
Nevertheless, USD/MXN extended its losses as US President Trump is likely to sign reciprocal tariffs at 18:00 GMT, although these tariffs are not expected to take effect until April 1.
Another reason for the sudden drop in USD/MXN is that the US dollar index (DXY) fell more than 0.55%, from 107.91 to 107.37.
Nevertheless, traders should note the monetary policy divergence between the Mexican central bank (Banxico) and the Federal Reserve, which suggests that the interest rate gap will narrow significantly in favor of the latter. Therefore, USD/MXN may resume its upward trend in the short term.
Mexico's economic calendar is empty, but deterioration in the auto sector and worse-than-expected industrial production data suggest that economic conditions are worse than expected.
This and US President Donald Trump's trade rhetoric against Mexico will act as a headwind for the Mexican currency.
The US Producer Price Index (PPI) rose 0.4% month-on-month in January, beating expectations of 0.3% and down from 0.5% in the previous reading. In the 12 months ending last month, PPI rose 3.5% year-on-year, beating expectations and rising from 3.3% in December.
Core PPI rose 0.3% mom, in line with expectations, and 3.6% y/y, above expectations of 3.3%.
Initial jobless claims for the week ended Feb 8 were 213K, below expectations of 215K, and the Feb 1 reading was 220K.
The Fed has taken a cautious approach after hot January CPI and PPI data. As the inflation slowdown worsened, officials have shifted to a slightly neutral stance, led by Fed Chairman Powell, who said on Wednesday that "we are close to but not yet at our inflation target," adding that "we want to keep policy restrictive for now."
The trade dispute between the U.S. and Mexico is still simmering. Although the two countries have found common ground before, USD/MXN traders should know that there is a 30-day pause, and tensions could re-emerge in late February.
USD/MXN is consolidating around the 50-day simple moving average (SMA) at around 20.50 with no clear bias in the past seven days. The distance between the 50-day and 100-day SMAs has narrowed sharply, suggesting that the bullish trend that started in April 2024 is losing steam after reaching a multi-year high at 21.29.
If buyers want to regain control, they must break through key resistance levels such as the January 17 high at 20.90, the 21.00 mark, and the year-to-date (YTD) high at 21.29. Conversely, if USD/MXN breaks below the 50-day SMA and breaks above the 100-day SMA at 20.23, it will pave the way for a challenge at the 20.00 mark. In case of further weakness, key support is seen at 19.50 and the 200-day SMA at 19.33.
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is roughly determined by the performance of the Mexican economy, the policies of the country's central bank, the amount of foreign investment in the country, and even the level of remittances from Mexicans living abroad, especially in the United States. Geopolitical trends can also influence the Mexican currency: For example, the near-shoring process - or the decision by some companies to move manufacturing capabilities and supply chains closer to their home country - is also seen as a catalyst for the Mexican currency, as the country is considered an important manufacturing hub in the American continent. Mexico is a major exporter of commodities, and oil prices are another catalyst for the MXN. ＂
The main goal of the Mexican Central Bank, also known as Banxico, is to keep inflation low and stable (at or near its 3% target, the midpoint of its 2% to 4% tolerance band). To do this, the bank sets an appropriate interest rate level. When inflation is too high, the Spanish central bank will try to curb it by raising interest rates, which increases the cost of borrowing for households and businesses, thereby cooling demand and the overall economy. Higher interest rates are generally good for the Mexican Peso (MXN) because they lead to higher yields, making the country more attractive to investors. Conversely, lower interest rates tend to weaken the MXN.
The release of macroeconomic data is key in assessing economic conditions and can have an impact on the valuation of the Mexican Peso (MXN). A strong Mexican economy based on high economic growth, low unemployment, and high confidence is good for the Mexican peso. Not only does it attract more foreign investment, but it may encourage the Bank of Mexico (Banxico) to raise interest rates, especially if such forces coincide with high inflation. However, if economic data is weak, the Mexican Peso may depreciate.
As an emerging market currency, the Mexican Peso (MXN) tends to strengthen during periods of risk appetite, or when investors perceive overall market risk as low and are therefore eager to participate in riskier investments. Conversely, the MXN tends to weaken during times of market turmoil or economic uncertainty, as investors tend to sell riskier assets and flee to more stable safe haven assets.