Mexican Peso on the defensive amid strong US Dollar – Crypto News – Crypto News
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Mexican Peso on the defensive amid strong US Dollar – Crypto News

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  • Mexican Peso weakens, USD/MXN rises 0.36%, as markets anticipate Fed policy decision.
  • Lowered expectations for Fed rate cut, Middle East tensions drive Peso down, Dollar up.
  • Investors focus on Jerome Powell’s speech for clues on Fed’s future monetary policy direction.

The Mexican Peso (MXN) begins this week on the back foot for the third consecutive week against the US Dollar (USD) as traders remain cautious ahead of the US Federal Reserve’s (Fed) monetary policy decision. Investors reducing bets the Fed will cut rates in March, along with geopolitical tensions in the Middle East, keep risk-perceived currencies weak, boosting the safe-haven status of the Greenback. Therefore, the USD/MXN exchanges hands at 17.21, up 0.36%.

USD/MXN traders are bracing for the Fed’s decision on Wednesday. Expectations suggest the US central bank will keep rates on hold, and according to recent statements by some policymakers, discussions about quantitative tightening (QT) could emerge at the next meeting. However, market participants are looking to Fed Chairman Jerome Powell’s first appearance of the year on the stand. In December, Powell shifted more dovish, which was followed by Fed officials pushing back against aggressive speculation that the Fed would ease policy aggressively. Traders estimate that Powell will take a more balanced approach on Wednesday.

Daily Digest Market Movers: Mexican Peso to extend its weekly losses, ahead of Fed decision

  • Ahead in the week, Mexico’s economic docket will reveal the Gross Domestic Product (GDP) preliminary reading for 2023’s last quarter, with estimates on a quarterly basis down at 0.3% from 1.1% in Q3. The consensus projects yearly figures down from 3.3% at 3%.
  • The Mexican Peso could remain bullish as data suggests inflation remains above target even though underlying numbers slipped below the 5% threshold for the first time. That, along with the latest strong labor market report, indicates economic strength. With risks for inflation remaining tilted to the upside, that could prevent the Bank of Mexico (Banxico) from cutting rates.
  • On the bearish front, two of Banxico’s Governors, one involving Governor Victoria Rodriguez Ceja, opened the door to ease policy in the first quarter of 2024, which could weigh on the Peso as the interest rate differential between Mexico and the US would shrink. The economy losing pace due to an upcoming slowdown in the US and geopolitical risks are a headwind for the Mexican currency.
  • Last week’s data featured Mexico’s Trade Balance hitting a surplus in December, while Economic Activity shrank in November. On the data front, the Unemployment Rate dropped, signaling the labor market remains robust.
  • On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.
  • Across the border, the US economy remains resilient, as GDP in Q4 of last year crushed forecasts despite easing from Q3’s 4.9%. That could force Fed officials to refrain from easing policy, but the latest inflation data suggests they’re close to getting inflation to its 2% target.
  • Nevertheless, mixed readings in other data suggest that risks have become more balanced. That is reflected by investors speculating that the Fed will cut rates by 139 basis points during 2024, according to the Chicago Board of Trade (CBOT) data.

Technical Analysis: Mexican Peso drops sharply as USD/MXN bounces off 50-day SMA

The USD/MXN price action on Monday has edged to the upside sharply with the risks of taking the bears out of the picture. A bullish engulfing chart pattern on the daily chart is putting the 200-day Simple Moving Average (SMA) at 17.34 back into play. Once that level is taken out, the 100-day SMA at 17.41 would be up next, followed by the December 9 high at 17.56, ahead of the May 23 high from last year at 17.99.

Conversely, if sellers step In, they must drag the USD/MXN exchange rate toward the 50-day SMA at 17.13. A decisive break will expose the January 22 low at 17.05, followed by the 17.00 psychological level.

USD/MXN Price Action – Daily Chart

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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