- The Mexican peso is under pressure, falling more than 1% with USD/MXN hitting a six-day high of 20.74.
- Strong US non-farm payrolls report for December boosts dollar; The Fed may hold interest rates longer.
- Banxico minutes point to deeper interest rate cuts, increasing pressure on the peso.
The Mexican peso (MXN) is under pressure against the US dollar, hitting a six-day low following the release of a stellar US employment report and after the Bank of Mexico (Banxico) revealed the possibility of discussing deeper interest rate cuts. In the upcoming meetings. The USD/MXN peso pair is trading at 20.70, up more than 1%.
The US Bureau of Labor Statistics (BLS) revealed that the economy added more jobs than expected, causing a slight decline in the unemployment rate. This increases pressure on the Fed, which has become more concerned about its mandate of maximum hiring in the second half of 2024.
Recent jobs reports have indicated that the labor market is strong, but inflation is not. According to the Services Purchasing Managers’ Index (ISM) report, prices paid rose sharply to 64.4, the highest level since early 2023. After the data release, market participants expected one rate cut by the Fed in 2025.
The Mexican economic calendar revealed that industrial production in November improved slightly, but the data was overshadowed by US data. Banxico on Thursday released the minutes of its latest meeting, which, despite acknowledging that inflation risks are tilted to the upside, indicated that monetary policy should be less restrictive, according to the board.
Next week, Mexico’s agenda will include gross fixed investment and retail sales. In the US, key data releases include inflation numbers on the producer and consumer side, along with retail sales and jobless claims for the week ending January 11.
Therefore, the peso will be at risk of further depreciation due to the lower interest rate differential between Mexico and the United States. Although Fed officials have stated that they are in an easing cycle, market players are looking at only 39 basis points of easing in the US this year versus 150 basis points by Banxico.
Daily summary of market drivers: Mexican peso declines amid US dollar strength
- The BLS reported that the economy added 256,000 people to the labor force, according to the December nonfarm payrolls report, beating expectations of 160,000. This comes despite a downward revision to November’s numbers, which were 212,000 instead of 227,000.
- The unemployment rate fell to 4.1%, while average hourly earnings fell from 4% to 3.9%. Following the report, traders now expect the Fed to implement just one rate cut in 2025.
- Minutes from the Banxico meeting revealed the development of disinflation, suggesting that the easing cycle may continue to limit monetary policy turmoil. To achieve this, the Board stated that “larger downward adjustments may be considered at some meetings.”
- The Central Bank of Mexico improved inflation expectations due to progress in headline and core inflation. Officials acknowledged that services inflation has declined and expect the CPI to approach its 3% target in the third quarter of 2026.
- US 10-year Treasury bonds rose to 4.788% before falling by five basis points to 4.739%. This subsequently affected the dollar, with USD/JPY turning negative, but close to remaining almost unchanged.
- The US Dollar Index (DXY) rose to 109.96, its highest level since November 2022. Recently, DXY pared some of its gains and reached 109.55, up 0.36%.
- The Federal Reserve revealed the minutes of its December meeting on Wednesday. Although policymakers lowered interest rates, some participants preferred to keep interest rates unchanged, as they noted that the development of the downward path of inflation had stalled.
- As a result, they adopted a more gradual approach with meeting minutes confirming that Fed officials opened the door to slowing the pace of interest rate cuts.
USD/MXN Technical Forecast: Mexican Peso remains heavy with USD/MXN rising above 20.35
Having surpassed 20.50, the USD/MXN is on track to test the current year-to-date peak of 20.90. The slope of the Relative Strength Index (RSI) has crossed its recent peak, indicating that the bulls are gaining strength. Therefore, it is expected that there will be further appreciation on account of the improved peso.
The first resistance will be at 20.90, followed by the 21.00 mark. With more strength, the next resistance will be the March 8, 2022 high at 21.46, ahead of 21.50 and the 22.00 psychological level.
On the other side and on the path to further resistance, if the USD/MXN falls below 20.50, it will expose the 50-day simple moving average (SMA) at 20.30. Once the next stop level is broken, the 20.00 psychological level is located, followed by the 100-day simple moving average at 19.96.
Frequently asked questions about the Mexican Peso
The Mexican Peso (MXN) is the most widely traded currency among its counterparts in Latin America. Its value is widely determined by the performance of the Mexican economy, the policy of the country’s central bank, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans living abroad, especially in the United States. Geopolitical trends can also move the Mexican peso: for example, offshoring – or the decision by some companies to move manufacturing capacity and supply chains closer to their home countries – is seen as a catalyst for the Mexican currency as the country is a major manufacturing hub in the Americas. . Another catalyst for the Mexican peso is oil prices as Mexico is a major exporter of this commodity.
The main goal of the Mexican Central Bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its 3% target, the midpoint of the 2% to 4% tolerance range). To this end, the Bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the economy as a whole. Higher interest rates are generally a positive for the Mexican Peso (MXN) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the Mexican peso.
Macroeconomic data releases are key to assessing the state of the economy 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, it may encourage the Bank of Mexico (Banxico) to increase interest rates, especially if this force is accompanied by higher inflation. However, if economic data is weak, the value of the Mexican peso is likely to decline.
As an emerging market currency, the Mexican peso tends to do its best work during periods of risk, or when investors view broader market risk as low and are therefore keen to take on higher-risk investments. Conversely, the Mexican peso tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell high-risk assets and flee to more stable safe havens.
