The Mexican Peso remained unchanged against the US Dollar during the North American session on Thursday after the Federal Reserve (Fed) lowered interest rates for the first time in four years. Data from the United States (US) failed to spark a movement on the exotic pair as the USD/MXN trades at 19.26, virtually unchanged.
A scarce Mexican economic docket leaves the emerging market currency leaning into the dynamics of the US economy. On Wednesday, the Fed cut rates by 50 basis points (bps) as it grew confident that inflation will “sustainably” attain its 2% goal and the labor market won’t soften further. In its monetary policy statement, Fed Chair Jerome Powell acknowledged that the dual mandate of price stability and maximum employment is now roughly balanced while noting that the economic outlook remains uncertain.
In the same meeting, Fed officials updated the Summary of Economic Projections (SEP) or Dot Plot, in which they foresee the federal funds rate finishing 2024 at 4.4%.
Recently, the US Department of Labor revealed that the number of Americans filing for unemployment benefits for the week ending September 14 was lower than expected but improved compared to the last reading.
The USD/MXN exotic pair rose toward a daily high of 19.40 after the data as this could dent the US central bank from easing policy aggressively, instead sticking to quarter percentage point reductions.
Meanwhile, investor eyes are on the Bank of Mexico (Banxico), which is expected to lower rates by 0.25% at the September 26 monetary policy meeting decision.
The USD/MXN uptrend remains in place, though the pair has failed to rally following the Fed’s decision. Next week, Banxico’s policy meeting could push the exchange rate out of the 19.00 – 19.50 range.
Momentum remains mixed but in the short-term it favors sellers as depicted by the Relative Strength Index (RSI).
That said, if the USD/MXN drops below the September 18 low of 19.06, it will expose the psychological 19.00 figure. Further losses lie underneath with the next support being the 50-day Simple Moving Average (SMA) at 18.99, followed by the last cycle low of 18.59, the August 19 daily low.
Conversely, If the USD/MXN climbs above 19.50, the next resistance would be the 20.00 psychological level. Further upside emerges at the yearly peak at 20.22, followed by the 20.50 mark.
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. 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 MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.