Market Data 
- Mexican Peso counterattacks, snapping two days of losses.
- Banxico Governor Victoria Rodriguez Ceja assures intervention if Peso exhibits “atypical behavior or extreme volatility.”
- Greenback weakens against Peso despite Fed’s unchanged rates and revised projections with US economic data showing mixed signals.
The Mexican Peso recovered some ground on Thursday and appreciated by 1.45 % following a verbal intervention by the Bank of Mexico (Banxico). Governor Victoria Rodriguez Ceja commented that the Bank is ready to step in if the Peso shows “atypical behavior or extreme volatility.” The USD/MXN trades at 18.45, at new two-day lows.
Mexico’s economic docket remains absent for the rest of the week, with traders awaiting the release of Aggregate Demand, Private Spending, and Retail Sales data next week. However, the USD/MXN exchange rate continues to be driven by political uncertainty about the changes to the Mexican Constitution that threaten the state of law.
In the meantime, on Wednesday, Banxico’s Governor Victoria Rodriguez Ceja commented that the Mexican central bank remains attentive to the USD/MXN exchange rate and insisted that policymakers are not trying to defend a specific level.
Aside from this, the Greenback is on the back foot against the Mexican currency even though the US Federal Reserve (Fed) held rates unchanged and adjusted their projections for future monetary policy. Fed Chair Jerome Powell and the central bank’s governors estimate one interest rate cut in 2024 instead of the three projected by the dot plot since December 2023.
Meanwhile, US economic data showed that prices paid by producers in May were virtually unchanged compared to April, while the number of Americans filing for unemployment benefits exceeded estimates.
Daily digest market movers: Mexican Peso on defensive amidst political uncertainty
- In February 2024, AMLO put forward several proposals to the Mexican Congress. These include a Supreme Court reform that suggests electing Supreme Court ministers through popular vote; an electoral reform aimed at electing electoral commission councilors by popular vote and reducing multi-member representation; and a reform of autonomous bodies that proposes dissolving the transparency body.
- Mexican Peso depreciation could weigh on the Bank of Mexico’s (Banxico) decision to ease policy on June 27 despite last month’s dip in core prices. Therefore, keeping interest rates higher could prompt deceleration in the economy and increase the odds of a possible recession.
- Morgan Stanley noted that if Mexico’s upcoming government and Congress adopted an unorthodox agenda, it would undermine Mexican institutions and be bearish for the Mexican Peso, which could weaken to 19.20.
- The US Department of Labor revealed that the Producer Price Index (PPI) in May was 2.2% YoY, below estimates of 2.5%, and a tenth below April’s 2.3%. Core PPI for the same month expanded 2.3% YoY, beneath the consensus and the previous reading of 2.4%.
- The latest US inflation report increased the odds for a Fed rate cut in September, according to the CME FedWatch Tool, from 46.7% to 60.5%.
- December’s 2024 fed funds futures contract hints that investors expect 38 basis points of rate cuts by the Fed through the end of the year.
Technical analysis: Mexican Peso advances as USD/MXN slides below 18.60
The USD/MXN uptrend remains intact despite retreating toward the 18.50s region, which could be seen as buyers taking a respite as the Relative Strength Index (RSI) turned overbought. Despite that, momentum favors further upside after the exotic pair cleared strong resistance levels, opening the door for higher spot prices.
The USD/MXN’s next resistance would be the year-to-date high of 18.99, followed by the March 20, 2023, high of 19.23. A breach of the latter will sponsor an uptick to 19.50, ahead of the psychological 20.00 mark.
On the other hand, sellers must push the USD/MXN back below the April 19 high of 18.15 if they want to keep the pair within the 18.00-18.15 trading range.
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.
