The Mexican peso rises while Banxico keeps rates unchanged and revises inflation forecasts upwards

• The Mexican peso moves around 17.60 due to the aggressive stance of the Bank of Mexico.
• Banxico revised upwards its inflation forecasts for 2024 from 3.57% to 3.875%.
• USD/MXN remains under downward pressure but needs to break the 17.5000 support to test the 17.00 level.

He Mexican peso (MXN) appreciated further against the US Dollar (USD) after the Bank of Mexico – also known as Banxico, kept rates unchanged at 11.25%, adding that it would be necessary to keep rates “at their current level for an extended period.” “. The USD/MXN pair reacted lower, breaking the previous daily low of 17.5792 and accelerating its downtrend towards the 17.5000 area.

In its monetary policy statement, Banxico’s Governing Board stated that the outlook for inflation remains uncertain over the entire horizon, with risks tilted to the upside. Mexico’s central bank added that economic activity and the labor market remain strong, and revised upward forecasts for headline and core inflation, as it expects a “gradual decline in previously anticipated inflation.”

Daily market movements: The Mexican peso appreciates even more below 17.60 after the Banxico movement

• Mexico’s unemployment rate fell from 3.1% in July to 3.0% month-on-month in August, reported the National Institute of Statistics (INEGI).
• Inflation for the first half of September in Mexico was 4.44%, below the 4.64% in August, according to the National Institute of Statistics (INEGI).
• The Mexican peso regained some ground after depreciating to levels last seen in late May 2023 and approached the 200-day simple moving average (SMA) at 17.88411 on risk aversion.
• Being an emerging market currency, the Mexican peso weakens due to risk aversion. Therefore, news about a possible US government shutdown triggered a flow into safe-haven assets, weakening the Mexican peso.
• The drop in oil prices weakens the Mexican currency, since its economy depends on crude oil exports.
• Rating agency Moody’s warned that the Mexican government’s fiscal strategy in 2024 must be credible after the June elections to define the country’s stable outlook.
• In July, Moody’s downgraded Mexico’s rating to “Baa2” with a “stable” outlook, but warned of fiscal pressures for the next government due to the 2024 economic budget.
• US Treasury yields rose following the Federal Reserve Open Market Committee’s (FOMC) decision in September to leave rates unchanged. However, points above 5% in 2024 confirmed the Fed’s mantra of raising rates for longer.
• US Dollar weakness will keep USD/MXN biased lower as traders target 17.50.
  

  Technical Analysis: Mexican Peso

  The Mexican peso recovered after depreciating to 17.8161 against the US dollar, close to the 200-day simple moving average (SMA) at 17.8410, although it is staging a comeback and cutting part of its losses, currently below the 17.6000 zone. Given the restrictive stance of Mexico’s central bank, USD/MXN could retreat towards the August 3 high at 17.4258, followed by the 20-day SMA at 17.3069, before extending its gains. Although the Relative Strength Index (RSI) broke out of the overbought territory, the uptrend remains intact.

INFLATION FREQUENTLY ASKED QUESTIONS

What is inflation?

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a percentage of inter-monthly and inter-annual variation. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation decreases.

What is the impact of inflation on currencies?

Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank typically raises interest rates to combat higher inflation, attracting more inflows of global capital from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

In the past, gold was the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case for most. of the times. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for gold because they increase the opportunity cost of holding gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates and makes the metal a more viable investment alternative.