Created
: 2024.05.01
2024.05.01 02:01
The Mexican Peso tumbles more than 0.41% against the US Dollar on Tuesday, following the release of Mexico's Gross Domestic Product (GDP) figures missing estimates for the first quarter on a yearly basis.
That alongside with a reacceleration of inflation, according to data revealed in the United States (US), weighed on the Mexican currency. The Greenback has recovered some ground though. At the time of writing, the USD/MXN trades at 17.08 after hitting a low of 16.95.
Mexico's National Statistics Agency (INEGI) revealed that GDP for Q1 2024 grew 1.6% YoY, a slower pace than the 2.4% in the last quarter of 2023 and beneath estimates of 2.1%. However, on a quarterly basis, the country grew 0.2% higher than the previous reading of 0.1% and exceeded the consensus of 0%.
Across the border, the US economic docket was busy, as the Employment Cost Index (ECI) a measure used by the Federal Reserve to assess inflation on wages was higher than expected, decreasing the odds of a rate cut by Fed Chairman Jerome Powell and Co.
Recent data witnessed Consumer Confidence deteriorating in the US, according to April's data by the Conference Board.
This week, the US economic docket will be busy, though the most significant events will be the releases of the ISM Manufacturing PMI and the Fed's monetary policy decision on May 1, followed by the Nonfarm Payroll figures on Friday and the ISM Services PMI.
The Mexican Peso is making a U-turn, depreciating on Tuesday as the USD/MXN edges up. Even though the pair sits below the weekly high of 17.24, it is approaching quickly toward the 200-day Simple Moving Average (SMA) at 17.17. Once surpassed, the next stop would be the January 23 swing high of 17.38, followed by the year-to-date (YTD) high of 17.92, ahead of 18.00.
On the other hand, if USD/MXN buyers fail to conquer the 200-day SMA, further losses are seen beneath the 17.00 threshold. Once cleared, the next stop would be the 50-day SMA at 16.81 before challenging last year's low of 16.62.
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.
Created
: 2024.05.01
Last updated
: 2024.05.01
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