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The Mexican Peso registers a new two-week low against the US Dollar

  • The advance of the Mexican Peso is limited by the Dollar, as the United States (US) economy remains solid.
  • The Bank of Mexico (Banxico) adjusts the country’s economic outlook and revises upward the growth forecasts for 2023 and 2024.
  • Banxico expects inflation to be 4.4% in the fourth quarter of 2023 and 3.4% in 2024, with the objective of reaching an inflation goal of 3%.
  • The OECD predicts a slowdown in the Mexican economy, largely due to the cooling of the US economy, which will affect Mexican exports.

He Mexican peso (MXN) plummets against the US dollar (USD) in a late trading session on Wednesday, after the US Department of Commerce revealed that the United States (US) economy is growing above trend , which could justify new measures by the US Federal Reserve (Fed). Consequently, USD/MXN rebounds from its daily lows and is trading near the week’s highs at 17.28, with a daily rise of 0.79%.

Mexico’s economic agenda witnessed the publication of the economic forecasts of the Bank of Mexico (Banxico) for 2023 and 204. In its quarterly report, Banxico revised economic growth upward from 3% to 3.3% for 2023 and predicts that the economy rebound from 2.1% to 3% in 2024. Regarding inflation prospects, the Mexican central bank forecasts inflation of 4.4% in the fourth quarter of 2023, while for 2024 it is estimated at 3.4%. The central bank expects general and underlying inflation to reach the 3% objective imposed by the institution.

Across the border, the US economy grew faster than expected, the US Bureau of Economic Analysis (BEA) reported, leading to a rise in the US Dollar Index (DXY), which tracks the evolution of the Dollar against six currencies. The DXY rises 0.23% to 102.95, which is a headwind for USD/MXN.

Recently, US Federal Reserve officials had crossed the news wires. Atlanta Fed President Raphael Bostic stated that he sees slower growth and falling inflationary pressures in the current direction of monetary policy. At the same time, Richmond Fed President Thomas Barkin commented that he is “skeptical” that inflation is on track toward the Fed’s target, while he maintains the option of higher interest rates.

Daily Movements: Mexican Peso Weakens as USD/MXN Rises Towards 17.28

  • The Organization for Economic Cooperation and Development (OECD) published Mexico’s economic outlook for 2024, in which the economy is expected to expand at a slower pace of 2.5%, below the growth rate of 3.4% registered in 2023.
  • The report cites the moderation of the U.S. economy, which would likely curb Mexico’s exports. The OECD suggests that the monetary policy of the Bank of Mexico (Banxico) should remain restrictive, as inflation is estimated to fall to 3.9% and 3.2% in 2024 and 2025, respectively.
  • Third-quarter US Gross Domestic Product (GDP) rose 5.2% quarter-on-quarter, beating estimates of 5%.
  • The US goods trade balance recorded a deficit of $89.8 billion in October, an increase of $3.5 billion from September’s deficit of $86.3 billion.
  • On Tuesday, Fed Governor Christopher Waller, a former hawk, commented that there is a good economic case for lowering rates if inflation continues to decline for several months.
  • A day after Fed Waller’s comments on interest rates, traders expect 115 basis points of rate cuts from the US central bank in 2024.
  • On November 27, Banxico Deputy Governor Jonathan Heath commented that underlying prices need to fall further, adding that one or two rate cuts could come next year, but “very gradually” and “very cautiously.”
  • On November 24, a report revealed that Mexico’s economy grew as expected in the third quarter on an annual and quarterly basis, suggesting that the Bank of Mexico will likely maintain its hardline stance, although it opened the door to some easing .
  • Mexico’s annual inflation increased from 4.31% to 4.32%, while core inflation continued to ease from 5.33% to 5.31%, according to data from November 23.
  • The idea in financial markets that the US Federal Reserve (Fed) is done raising rates has kept the dollar lower, but today it has found some relief.
  • Data released earlier this month showed a drop in prices paid by consumers and producers in the US, increasing investor speculation that the Fed’s tightening cycle is over.
  • A Citibanamex survey suggests that 25 of 32 economists expect Banxico’s first rate cut in the first half of 2024.
  • The survey shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, Citibanamex revealed.
  • The same survey revealed that economists forecast annual headline inflation of 4.00% and core inflation of 4.06%, both readings for next year, while the USD/MXN exchange rate is seen at 19.00, from 18.95, towards the end of 2024.

Technical Analysis: The Mexican peso loses strength although the USD/MXN bias remains bearish below the 200-day SMA

Even though USD/MXN hit a new weekly high of 17.22, buyers are barely holding on to minuscule gains. The 20-day SMA is about to cross below the 100-day SMA, both around 17.34, a sign that the downtrend is gaining strength. If the pair falls below 17.05, the next support would be the 17.00 figure, before challenging the year-to-date low of 16.62.

Conversely, if buyers achieve a daily close above the November 21 high at 17.26, it would test the confluence of the 20-day and 100-day SMAs at 17.34. The 200-day SMA stands at 17.58.

Frequently asked questions about interest rates

What are interest rates?

Financial institutions charge interest rates on the loans they grant to borrowers and on the interest they pay to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks are typically mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below target, the central bank can cut base lending rates, with a view to stimulating credit and boosting the economy. If inflation rises substantially above 2%, the central bank usually raises interest rates to try to reduce it.

How do interest rates influence currencies?

Higher interest rates often help strengthen a country’s currency by making it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

In general, higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US dollar (USD) usually rises, and since gold is priced in dollars, the price of gold falls.

What is the Federal Funds rate?

The Fed funds rate is the overnight rate at which U.S. banks lend to each other. This is the main rate that the Federal Reserve usually cites at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the quoted figure.
Market expectations about the future Fed funds rate are tracked by CME’s FedWatch tool, which determines the behavior of many financial markets in anticipation of the Federal Reserve’s future monetary policy decisions.

Source: Fx Street

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