- Mexican Peso gains 0.88% against the USD as USD/MXN trades at 18.59.
- Fed’s “hawkish” hold fails to boost USD, with policymakers highlighting balanced dual mandate risks.
- Powell acknowledges disinflation and labor market concerns, making Friday’s Nonfarm Payrolls report crucial.
- Banxico’s Deputy Governor suggests gradual rate cuts amid Mexico’s slowing economic growth.
The Mexican Peso soars sharply against the US Dollar even though the Federal Reserve delivered a “hawkish” hold and pushed back against reducing rates. Despite that, the Greenback failed to gain traction and the USD/MXN trades at 18.52, down over 0.80%.
In its monetary policy statement, Fed officials noted, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Fed policymakers stated that inflation despite easing, remains “somewhat elevated” and stated the dual mandate risks had become more balanced.
In the meantime, Fed Chair Jerome Powell expressed that the disinflation process has ‘broadened’ and acknowledged downside risks in the labor market. Powell added that “We don’t think of the labor market as it is currently as a likely source of inflation pressures” and that if they see a downturn in the labor market, “we should respond.”
Due to these remarks, Friday’s Nonfarm Payrolls report for July would be a crucial piece of the puzzle as the Fed pivoted towards becoming slightly concerned about employment.
Following Powell’s remarks, market participants had priced in 70 bps of interest rate cuts toward the end of the year.
On Wednesday, the Mexican economic docket was empty, yet traders shrugged off Tuesday’s data that showed the economy is decelerating. The Gross Domestic Product (GDP) for Q2 rose 0.2% QoQ, below estimates of 0.4% and a 0.3% increase in Q1. This justified comments by Omar Mejia Castelazo, a Deputy Governor at the Bank of Mexico (Banxico), who favors lowering rates gradually and emphasized that this would not mean the bank will embark on an easing cycle.
Across the border, US economic data showed that private hiring increased less than expected, according to Automatic Data Processing (ADP) Employment Change data for July.
Other data showed the Employment Cost Index (ECI) dipped three-tenths in Q2 2024, while Pending Home Sales bounced off record lows not reached since 2001.
The CME FedWatch Tool shows odds for a 25-basis-point rate cut in September at 100%. Data from the Chicago Board of Trade (CBOT) shows that the December 2024 fed funds rates futures contract suggests that policymakers will ease policy at least 55 basis points.
Daily digest market movers: Mexican Peso appreciates as economy cools down
- Mexico’s National Statistics Agency revealed that GDP for Q2 2024 grew 2.2% YoY on its preliminary reading, above estimates of 2% and the previous quarter’s 1.6% expansion.
- Mexico’s Deputy Finance Minister Gabriel Yorio said that public debt is expected at a level of 48.6% of GDP at the end of President Andres Manuel Lopez Obrador’s term.
- Last week, Mexico’s June Balance of Trade was $-1.073 billion, missing the consensus of $1 billion.
- US ADP Employment Change in July showed that private hiring rose by 122K, below the estimated 150K and missing the 155K created in June.
- The Employment Cost Index (ECI) decelerated from 1.2% to 0.9% QoQ, below forecasts of 1%.
- Pending Home Sales in the US increased 4.8% MoM in June, exceeding estimates of 1.5% growth following May’s -1.9% plunge.
Technical analysis: Mexican Peso recovers as USD/MXN drops beneath 18.60
The USD/MXN is forming a “bearish engulfing” candlestick pattern amid growing expectations that Fed Chair Jerome Powell and company will hint at the first interest rate cut at the September meeting.
The Relative Strength Index (RSI) shows momentum falling steeply, meaning sellers are moving in anticipation of the Fed’s decision. This and the USD/MXN clearing the June 28 peak at 18.59 could pave the way for a deeper pullback.
That said, USD/MXN’s first support would be the 18.50 level. Once surpassed, the next stop would be the psychological 18.00 mark, followed by the 50-day Simple Moving Average (SMA) at 17.97.
On the flip side, if buyers lift the exotic pair above 18.60, that could sponsor a leg up toward the year-to-date (YTD) peak of 18.99 ahead of 19.00 per US Dollar. Further upside is seen at the March 20, 2023, high of 19.23, ahead of 19.50.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
