- The Mexican peso rebounded somewhat while the Fed's recent minutes were less dovish than traders expected.
- Mexico's manufacturing PMI fell to 52.0, putting pressure on the peso amid strong business confidence data.
- USD/MXN recovers above 17.00 after briefly falling due to the rise in the US dollar
The Mexican peso (MXN) started the year weaker against the US dollar (USD) after the exotic peso fell to a three-month low of $16.86 on December 28. Despite US Treasury yields turning negative, the greenback (USD) remains at a high level, thus supporting the USD/MXN pair. At the time of writing, this exotic pair is trading in his 17.03 area, registering a slight gain of 0.03%.
Minutes of the meeting show that most Fed officials believe interest rates are nearing or have peaked. However, they noted that there is uncertainty about how long restrictive policies should remain in place. It acknowledged that although some improvement in inflation was observed, core service prices remained high. It was also mentioned that some officials may support keeping current interest rates for longer than originally expected.
Mexican economic data released on Tuesday showed the S&P World Manufacturing PMI in December at 52.0, below November's 52.5, weighing on the Mexican currency. Business confidence improved during the day, with USD/MXN traders digesting the United States (US) economic indicators released around 3:00 PM Japan time. However, market players are still waiting for the release of the latest Federal Reserve Board meeting minutes.
Daily Digest Market Trends: Mexican Peso's decline gains momentum due to strong US economic indicators
- Although Mexico's business confidence improved to 54.6 from 54 in November, it was unable to support the Mexican peso, which remained weak during the session.
- Comments from Richmond Federal Reserve Governor Thomas Barkin supported the US dollar, saying the US central bank has made substantial progress in controlling inflation. He added that although the economy is heading for a soft landing, risks remain and the possibility of further rate hikes is on the table.
- According to US Economic Statistics, the ISM manufacturing PMI was 47.4, higher than the expected 47.1 compared to the pre-measured reading of 46.7.
- At the same time, the Job Openings and Labor Turnover Survey (JOLTS) report for November showed a lower-than-expected increase in jobs from 8.85 million to 8.79 million, but the October figure was revised upward to 8.852 million.
- The December Federal Open Market Committee (FOMC) minutes were subsequently scrutinized by traders following a dovish policy shift by Federal Reserve Chairman Jerome Powell that fueled a rally in stocks towards the end of 2023. will be done. Fed officials estimate there will be three rate cuts by the end of December 2024. Depicted by the Summary Economic Projections (SEP).
- Money market futures data provided by the Chicago Board of Commodities and Exchanges (CBOT) shows traders remain confident the Fed will cut interest rates by 150 basis points (bp) toward the end of the year.
Technical Analysis: Mexican Peso Remains Bearish Despite USD/Mexican Peso Buyer Efforts
From a technical perspective, USD/MXN remains bearishly biased, but sellers are pushing the daily close below the November 27 low of 17.03 to increase the probability of pushing the price below the 17.00 figure. need. If achieved, it could pave the way for a test around 16.86 before falling towards last year's low of 16.62.
Conversely, if USD/MXN remains above the 17.00 figure, it could open the way to the 17.37-17.43 area, which is the confluence of the 50-day, 100-day, and 200-day simple moving averages (SMAs). There is sex. Beyond this area, USD/MXN is expected to reach the psychological 17.50 area, above the November 10 high of 17.93.
Also read: Annual forecast for Mexican peso prices: which factors will have the most impact in 2024: economic or political?
USD/MXN daily chart
Central Bank Frequently Asked Questions
Central banks have the important mission of ensuring price stability in a country or region. Whenever the prices of certain goods and services change, an economy faces inflation or deflation. A continuous increase in the price of the same product indicates inflation, and a continuous decrease in the price of the same product indicates deflation. The central bank's job is to keep demand constant by adjusting policy interest rates. The mandate for the largest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BOE), is to keep inflation close to 2%.
Central banks have one important tool at their disposal to raise or lower inflation. It is to adjust the base policy rate, commonly known as the interest rate. Upon prior communication, the central bank will issue a statement regarding the policy rate and provide additional reasons as to why it may maintain or change (lower or increase) the policy rate. Local banks will adjust their savings and lending rates accordingly, making it harder or easier for people to earn money on their savings and for businesses to take out loans and invest in their businesses. I will do it. Monetary tightening is when a central bank significantly raises interest rates. Lowering the base interest rate is called monetary easing.
Central banks are often politically independent. Members of the central bank policy committee go through a series of panels and hearings before being appointed to the policy committee seat. Each member of the board often has certain beliefs about how the central bank should control inflation and subsequent monetary policy. Doves are members who are happy with inflation slightly above 2% but want a very accommodative monetary policy with low interest rates and low lending to significantly boost the economy. Members who would rather raise interest rates to reward savings and keep a constant eye on inflation are called “hawks'' and will not rest until inflation is at or slightly below 2%.
There is usually a chairperson or president who leads each meeting, and consensus must be built between hawks and doves, with votes split to avoid a 50-50 tie on the pros and cons of the current topic. have the final say in the matter. Policies need to be adjusted. The chair often gives a speech that can be viewed live, conveying the current financial stance and outlook. Central banks seek to promote monetary policy without causing wild fluctuations in interest rates, stocks, and currencies. All members of the central bank are expected to signal their stance on markets ahead of the policy meeting event. Starting several days before the policy meeting, members are prohibited from speaking publicly until new policies are communicated. This is called the blackout period.
