- The Mexican Peso is under pressure, falling more than 1% as USD/MXN hits a six-day high of 20.74.
- Strong US Nonfarm Payrolls in December Boost Dollar; the Fed could hold rates longer.
- Banxico minutes suggest larger rate cuts, adding 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 United States (US) employment report and after the Bank of Mexico (Banxico) revealed that larger interest rate cuts could be discussed in upcoming meetings. USD/MXN 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 drop in the unemployment rate. This adds pressure to the Federal Reserve (Fed), which has become more concerned about its maximum employment mandate in the second half of 2024.
Recent employment reports hinted that the labor market is strong, but inflation is not so strong. According to the ISM Services PMI report, the prices paid subcomponent rose sharply to 64.4, its highest level since early 2023. Following the release of the data, market participants anticipated an interest rate cut by the Fed in 2025.
Mexico’s economic agenda revealed that Industrial Production in November improved slightly, but the data was overshadowed by data from the US. On Thursday, Banxico published the minutes of its latest meeting, which despite acknowledging that inflation risks are inclined upwards, indicated that monetary policy needs to be less restrictive, according to the Governing Board.
Next week, Mexico’s agenda will include Gross Fixed Investment and Retail Sales. In the US, key data releases include producer and consumer side inflation figures, along with Retail Sales and Jobless Claims for the week ending January 11.
Therefore, the Peso would be at risk of further depreciation due to the narrowing of the interest rate differential between Mexico and the US. Although Fed officials stated that they are in a easing cycle, market players are observing only 39 basis points (bps) of flexibility in the US this year compared to 150 bps by Banxico.
Daily Market Summary: Mexican Peso Plunges Amid Strong US Dollar
- The BLS reported that the economy added 256,000 people to the workforce, according to the December Nonfarm Payrolls report, exceeding expectations of 160,000. This is despite the downward revision of the November figures, which were 212,000 instead of 227,000.
- The unemployment rate decreased to 4.1%, while average hourly earnings (AHE) fell from 4% to 3.9%. Following the report, traders now anticipate that the Federal Reserve will implement only one rate cut in 2025.
- The minutes of the Banxico meeting revealed the evolution of disinflation, suggesting that the easing cycle could continue to reduce monetary policy concerns. To achieve this, the Governing Board stated that “larger downward adjustments could be considered at some meetings.”
- Mexico’s central bank improved the inflation outlook due to progress in headline and core inflation. Officials acknowledged that services inflation has declined and expect the CPI to converge to its 3% target in the third quarter of 2026.
- The 10-year US Treasury yield soared to 4.788% before retreating five basis points (bps) to 4.739%. This consequently weighed on the Dollar, as USD/JPY turned negative, although close to remaining almost unchanged.
- The US Dollar Index (DXY) rose to 109.96, its highest level since November 2022. Recently, the DXY pared some of its gains and is at 109.55, up 0.36%.
- The Fed released the minutes of its December meeting on Wednesday. Although monetary policymakers reduced interest rates, some participants favored keeping rates unchanged, noting that inflation’s downward trajectory has stalled.
- Accordingly, they took a more gradual approach, as the minutes stressed that Fed officials opened the door to slowing the pace of interest rate cuts.
USD/MXN Technical Outlook: Mexican Peso Remains Heavy as USD/MXN Rises Above 20.35
Having broken through the 20.50 figure, USD/MXN is on track to test the current year-to-date (YTD) peak of 20.90. The slope of the Relative Strength Index (RSI) surpassed its last peak, signaling that the bulls are gaining strength. Therefore, a further rise is expected to the detriment of the improved Peso.
The first resistance would be 20.90, followed by the 21.00 level. With further strength, the next resistance would be the March 8, 2022 high of 21.46, before 21.50 and the psychological level of 22.00.
On the other hand and on the path of greatest resistance, if USD/MXN falls below 20.50, this will expose the 50-day SMA at 20.30. Once surpassed, the next stop is the psychological level of 20.00, followed by the 100-day SMA at 19.96.
Mexican peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is largely 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, particularly in the United States. . Geopolitical trends can also affect the MXN: for example, the nearshoring process (or the decision by some companies to relocate manufacturing capacity and supply chains closer to their home countries) is also seen as a catalyst for the currency. Mexican, as the country is considered a key manufacturing center on the American continent. Another catalyst for the MXN is oil prices, as Mexico is a key exporter of the raw material.
The main objective of Mexico’s central bank, also known as Banxico, is to keep inflation at low and stable levels (at or near its target of 3%, the midpoint of a tolerance band between 2% and 4%. %). To do this, the bank establishes an appropriate level of interest rates. When inflation is too high, Banxico will try to control it by raising interest rates, which makes borrowing more expensive for households and businesses, thus cooling demand and the economy in general. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken the MXN.
The publication of macroeconomic data is key to evaluating 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 MXN. Not only does it attract more foreign investment, but it may encourage the Bank of Mexico (Banxico) to raise interest rates, particularly if this strength is accompanied by high inflation. However, if economic data is weak, the MXN is likely to depreciate.
As an emerging market currency, the Mexican Peso (MXN) tends to rise during periods of risk, or when investors perceive overall market risks to be low and are therefore eager to engage in investments that carry higher risk. . Conversely, the MXN tends to weaken in times of market turbulence or economic uncertainty, as investors tend to sell riskier assets and flee to more stable safe havens.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
