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    Mexican Peso gains marginally after Mexico’s GDP data

    Source Fxstreet
    Jan 30, 2024 16:02
    • Mexican Peso notches minor gains with USD/MXN trading at 17.23, up 0.03%, as investors assess economic indicators from Mexico.
    • Mexican GDP growth falls short of expectations, influenced by Banxico's aggressive interest rate policy now at 11.25%.
    • In the US, Consumer Confidence improves and the robust labor market is highlighted by the latest JOLTs report, which could affect Federal Reserve policy.

    The Mexican Peso holds minuscule gains versus the US Dollar in early trading during the North American session, sponsored by economic data from Mexico. In the US, the release of the JOLTs reports and Conference Board (CB) Consumer Confidence data could underpin the Greenback (USD), ahead of the US Federal Reserve (Fed) monetary policy decision on Wednesday. The USD/MXN exchanges hands at 17.19, down 0.13%.

    Mexico’s economy grew below estimates, revealed the National Statistics Agency (INEGI). Higher interest rates set by the Bank of Mexico (Banxico) at 11.25% is having the desired effect on the economy as the latest GDP data trends lower alongside business activity. Across the border, CB Consumer Confidence improved in January, while the labor market remains hot, according to the JOLTs data.

    Daily Digest Market Movers: Mexican Peso barely blinks after GDP figures, awaiting Fed decision

    • INEGI revealed that Mexican GDP for Q4 2023 expanded 0.1% QoQ, below forecasts of 0.4% and trailing the 1.1% expansion achieved in the third quarter. For annually based figures, GDP saw its preliminary reading rise by 2.4%, missing forecasts of 3.1% and down from 3.3% in Q3.
    • US Job Openings rebounded above the 9 million threshold, the highest level in three months and exceeding estimates of 8.75 million. The data emphasizes the strength of the labor market and might deter Fed officials from cutting rates sooner than expected.
    • Further, US data revealed that Consumer Confidence exceeded estimates of 114, coming at 114.8, up from December’s 108. “January's increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board.
    • Today’s data shows the Mexican economy remains strong. Coupled with inflation remaining above Banxico’s target, this could delay the first rate cut by Banxico, even though some officials commented that rate trimming could happen in the first quarter of 2024.
    • If Banxico’s officials remain determined to begin its easing cycle in Q1 of 2024, that could depreciate the emerging market currency due to the reduction of interest rate differentials. That could also underpin the USD/MXN pair toward the psychological 18.00 figure.
    • Additional factors that might depreciate the Mexican currency are geopolitical risks and risk aversion
    • 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 status firm as USD/MXN hovers near 17.20

    The USD/MXN trades sideways and is about to form an ascending triangle. The 200-day Simple Moving Average (SMA) at 17.34 is the first resistance level. If buyers conquer that level, the next stop would be the 100-day SMA at 17.41, followed by the December 9 high at 17.56. Last of all sits the May 23 high from last year at 17.99.

    On the flipside, although a less likely scenario, the USD/MXN exchange rate could drop below the 50-day SMA at 17.13. A breach of the latter will expose the January 22 low at 17.05, followed by the 17.00 psychological level.

    USD/MXN Price Action – Daily Chart

    Mexican Peso FAQs

    What key factors drive the Mexican Peso?

    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.

    How do decisions of the Banxico impact the Mexican Peso?

    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.

    How does economic data influence the value of the Mexican Peso?

    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.

    How does broader risk sentiment impact the Mexican Peso?

    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.

    Disclaimer: For information purposes only. Past performance is not indicative of future results.
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