- The Mexican peso weakens amid US economic data and upcoming political events.
- Gross fixed investment in Mexico showed slight improvement in October, still below previous highs.
- Fed Governor Waller notes that more aggressive interest rate cuts may depend on future economic data.
The Mexican peso (MXN) fell to a three-day low against the US dollar (USD) as traders digested economic data released in the United States and as financial markets prepare for the inauguration of US President-elect Donald Trump next week. USD/MXN is trading at 20.80, up over 1.30%.
Mexico’s economic calendar this week revealed that total fixed investment improved in October, reaching 0.1% compared to the previous month, up from a 0.7% contraction in November data. However, the numbers reported by the National Institute of Geostatistics and Informatics (INEGI) remained meager compared to the double-digit numbers revealed in April 2024.
In the US, December retail sales revealed by the US Census Bureau remained strong despite missing expectations, but an upward revision to November numbers suggests the economy remains healthy.
Meanwhile, Federal Reserve Governor Christopher Waller was downbeat during an interview with CNBC, noting that the US central bank may cut interest rates sooner and faster than expected if data allows.
This week, Mexico’s economic calendar remains absent, as investors await next week’s inflation data along with retail sales. In the United States, the table will include housing data.
Daily Market Movers Summary: The Mexican peso is under pressure on speculation about Trump’s policies
- The Mexican peso will continue to come under pressure as we get closer to Trump’s inauguration, as there are fears that he will impose tariffs and harsh immigration policy.
- In addition, the divergence between the Bank of Mexico (Banxico) and the Fed favors further appreciation in the USD/MXN pair, as the interest rate differential will decrease by 150 basis points.
- According to the latest survey of private sector economists at Citi, Banxico is expected to cut interest rates by 200 basis points in 2025. The Fed expects to cut rates by 50 basis points, according to the latest Summary of Economic Projections (SEP).
- US retail sales for December rose 0.4% month over month, surpassing the mark. However, an upward revision to November’s numbers to 0.8% showed that the economy remains strong.
- Initial jobless claims for the week ending January 10 rose by 217,000 from 203,000 the previous week, beating estimates of 210,000.
- Money market futures are priced in for 40 basis point Fed rate cuts in 2025, according to CME FedWatch Tool data.
USD/MXN Technical Forecast: Mexican Peso declines as USD/MXN rises above 20.80
On Thursday, the exotic pair resumed its uptrend, with traders eyeing the year-to-date peak at 20.90. At the time of writing, the USD/MXN pair is facing strong resistance at the 20.86 area, the high of January 13, just ahead of the latter. Additional upside could be seen, once these levels are crossed, with the next major resistance levels emerging at 21.46, the peak of March 8, 2022, followed by 21.50 and the 22.00 psychological level.
On the other hand, if the USD/MXN crosses above the 50-day SMA at 20.34, this will reveal the 100-day SMA at 20.00, followed by the October 18 swing low at 19.64.
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 perceive that broader market risk is low and are therefore keen to deal with investments that carry higher risks. Conversely, the Mexican peso tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.
