- Mexican Peso rally pauses, influenced by mixed inflation data and Banxico rate cut.
- Core CPI deceleration backs Banxico move, yet annual inflation worries linger.
- USD/MXN’s next moves are eyed with upcoming US inflation data focusing traders on 16.00, 17.00 levels.
The Mexican Peso loses steam against the US Dollar on Tuesday after refreshing almost nine-year highs of 16.26. Mexico’s inflation data was mixed, though the emerging market currency tumbled more than 0.5%, as price action seems overextended. The USD/MXN trades at 16.40.
Mexico’s Consumer Price Index (CPI) was lower than estimated as the disinflation process continued. In the same tone, core CPI on a yearly and monthly basis decelerated, justifying the Bank of Mexico’s (Banxico) decision to lower rates on March 21. However, not everything was good news for the central bank as the yearly CPI exceeded estimates.
Maria Marco, an analyst at Monex Europe, said, “Given that at the March meeting the entire Board of Governors devoted much of their efforts to stressing that the balance of risks to inflation remains skewed to the upside, today’s data confirms our view that Banxico didn’t embark on an uninterrupted sequence of rate cuts last month.”
That said, USD/MXN traders’ focus shifts toward the next inflation report in the United States (US). Softer data could drive the USD/MXN toward the 16.00 psychological barrier. Otherwise, the pair could surpass the 16.50 figure with buyers eyeing 17.00.
Daily digest market movers: Mexican Peso slips post inflation report
- Mexico’s CPI rose 0.29% MoM, according to the National Statistics Agency (INEGI). This was lower than the expected 0.36% increase and higher than the 0.09% rise noted in February.
- Core inflation registered a rise of 0.44%, which was lower than the 0.51% that economists had forecast and below the 0.49% increase in February.
- US Treasury bond yields plunged sharply, with the 10-year benchmark coupon down six basis points to 4.362%. Consequently, the US Dollar Index (DXY) remains virtually unchanged with the DXY standing at 104.14, up by a minimal 0.02%.
- Market participants’ expectations that the Fed would cut rates three times this year remain volatile, according to the CME FedWatch Tool. The odds for June edged from 52% to 57.7%, while for July, they stood at 74%.
Technical analysis: Mexican Peso loses momentum as USD/MXN jumps from 2015 lows
The USD/MXN fell to a new nine-year low at around 16.25, with traders posing to drive the exchange rate below that level toward the 16.00 figure. Even though the Relative Strength Index (RSI) turned oversold, sellers are gaining momentum. Therefore, the next support would be the psychological 16.00 figure.
Nevertheless, the pair made a U-turn, with the USD/MXN about to form a “bullish engulfing” chart pattern that could drive the exchange rate higher. The first resistance would be the psychological 16.50 mark, followed by last year’s 16.62 mark. Once those two levels are cleared, buyers will target 17.00.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
