Mexican Peso pressured on economic weakness and trade fears
- Mexican Peso slips amid rising bets on Banxico rate cut and global uncertainty.
- Mexico’s economic data disappoints with private spending plunging and activity estimates pointing to contraction in February.
- Banxico expected to cut rates by 50 bps on March 27 as inflation remains above target and GDP is revised down.
- US-Mexico trade tensions and Fed caution keep the USD/MXN buoyant with traders eyeing next week’s inflation and rate decisions.
The Mexican Peso remained defensive against the US Dollar on Friday, fueled by fears about trade policies the United States (US) implemented amid a busy week in the central bank space. Softer data in Mexico suggest the economy is slowing down harder than expected, hence the Peso’s depreciation. The USD/MXN trades at 20.23, up 0.45%.
During the week, Mexico’s economic data was mixed following the release of Aggregate Demand and Private Spending figures. The former expanded, but spending plunged in the fourth quarter of last year. A preliminary reading of economic activity estimates that the economy contracted in February, increasing the odds that Banco de Mexico (Banxico) would continue to ease policy even though inflation hadn’t reached the 3% goal.
The latest Citi Mexico Expectations survey revealed a unanimous consensus that Banxico would cut interest rates by 50 basis points (bps) at the March 27 meeting. Most analysts revised Mexico’s primary reference rate for 2025 downward and revised up the headline and core inflation figures.
Of note is that the Gross Domestic Product (GDP) was revised down, while the USD/MXN exchange rate was adjusted slightly lower.
Across the border, the US economic docket remained empty on Friday, but traders continued to digest the Federal Reserve’s (Fed) monetary policy decision on Wednesday.
The statement revealed that policymakers see the policy as appropriate and hinted they would cool the pace of the balance sheet reduction. Fed Chair Powell said they’re not in a rush to cut rates and acknowledged some uncertainty about the future of the economy due to US tariffs.
Other officials crossed the newswires on Friday yet failed to trigger a USD/MXN exchange rate reaction. New York Fed President John Williams said the current modestly restrictive monetary policy is “entirely appropriate,” adding that uncertainty makes it hard to know how the economy will perform.
The Chicago Fed’s Austan Goolsbee said that when there is a lot of uncertainty, you must wait for things to clear up.
Next week, Mexico’s economic docket will feature March’s mid-month inflation figures, Retail Sales, Trade Balance numbers and Banxico’s interest rate decision. In the US, traders would eye the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index.
Daily digest market movers: Mexican Peso slumps as economists eye dovish Banxico
- The Citi Mexico Expectations Survey showed that most analysts expect interest rates to end at 8% in 2025, down from 8.25% in the previous release. The USD/MXN is expected to end at 20.98, down from 21.00 in the last survey.
- March’s mid-month inflation is expected to rise from 3.77% in February to 3.80% YoY, as depicted in the poll, and core prices are foreseen edging up from 3.61% to 3.65% YoY.
- Inflation expectations remained anchored in the high 3% range, while GDP is foreseen expanding by 0.6%, down from 0.8% in the last survey.
- Mexico’s Global Indicator of Economic Activity fell 0.7% YoY in February. Compared to January, the economy most likely grew 0.2% MoM.
- The Organization for Economic Cooperation & Development revealed earlier this week that US tariffs on Mexican products could spur a recession in Mexico.
- Traders had priced the Fed to ease policy by 71 basis points (bps) throughout the year, as revealed by data from the Chicago Board of Trade.
USD/MXN technical outlook: Mexican Peso retreats as USD/MXN climbs above 20.20
USD/MXN consolidates after bouncing off yearly lows reached on March 14 at 19.84, but it remains capped by the 20.30 figure, defended by sellers, which are also leaning into the 100-day Simple Moving Average (SMA) at 20.35 and the 50-day SMA at 20.40.
The Relative Strength Index (RSI) is bearish. However, in the short-term, it favors buyers. The index is about to cross above its neutral line, which would pave the way for further upside.
In that outcome, USD/MXN needs to clear the 100 and 50-day SMAs. Once surpassed, the next ceiling level would be the March 4 peak at 20.99. Conversely, the first key support is 20.00, followed by the YTD low of 19.84, ahead of the 200-day SMA at 19.68.
Mexican Peso FAQs
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.
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