As the Mexican Peso hovers near its three-week lows, market participants are bracing for a significant update from the Bank of Mexico (Banxico) regarding interest rates. The dynamics impacting the peso are largely driven by recent movements in the US Dollar, which has experienced a robust surge following a somewhat unexpected “hawkish cut” from the Federal Reserve. This environment has fostered a sense of caution and anticipation ahead of Banxico’s upcoming decision, which is broadly expected to include a 0.25% rate cut, bringing the benchmark rate down to 10%. This will mark the fifth such reduction in 2023, indicating a trend that may continue into the next year.
The technical outlook for the USD/MXN pair reflects increasing bullish momentum, with the exchange rate currently sitting above the 20.30 mark. This level has become pivotal, as it suggests that the US Dollar is strengthening against the Peso, likely due to the Fed’s policy moves and the associated increase in risk aversion in the market. The US Dollar Index (DXY) recently surged to test levels not seen in two years, reflecting robust confidence in the US economic projections. Until contradictory data emerges from the US, it appears the dollar will maintain its strength.
The decision by the US Federal Reserve to cut rates to a range of 4.25% to 4.50% was coupled with revised interest rate projections for 2025, suggesting at least two more cuts next year—a departure from previous expectations of four cuts. Additionally, the Fed’s upward revision of inflation expectations to 2.5% should be monitored closely, as analysts relate these changes to potential inflationary pressures from US economic policies under a new administration.
In Mexico, economic metrics also tell a compelling story. Recent data revealed an unexpected 0.3% decline in retail sales for October, contrasting sharply with the anticipated 0.2% growth. While the yearly decline in retail consumption moderated slightly, moving from 1.5% to 1.2%, the overall economic sentiment remains cautious. Analysts at Citi anticipate further actions from Banxico, anticipating not just today’s decision to cut rates to 10%, but also a cumulative reduction of 150 basis points over the next year, potentially unsettling the currency dynamics even further.
Reacting to the Federal Reserve’s policies, market sentiments shifted significantly, pushing US Treasury yields and the US Dollar into a rally. The rise in the yield of the benchmark 10-year note to six-month highs above 4.50% can be interpreted as a serious indication of increased investor confidence in the US economy, even as stocks and other risk-sensitive assets face downward pressure. This market behavior underscores a broader trend toward risk aversion, which inevitably affects the capital flows into emerging markets like Mexico.
Amidst these complexities and uncertainties, analysts continue to propose forecasts regarding the USD/MXN exchange rate. According to current market assessments, it is expected that the dollar may climb to approximately 21.00 Pesos by next year, as the Mexican economy is projected to slow down significantly. Growth predictions suggest a mere 1.6% expansion in 2024, followed by an even more modest 1.2% increase in 2025, thus creating a less favorable environment for the Peso.
The USD/MXN pair has broken above the previously established resistance level of 20.30, entering a consolidation phase below 20.40. This behavior, combined with bullish technical indicators—such as price action above the 100 SMA and a Relative Strength Index (RSI) that, though increasing, remains below overbought levels—suggests that the tone of the currency pair will remain bullish in the short term. However, the key support level at 20.00 must be maintained to prevent significant downward corrections.
The interplay of US and Mexican monetary policy, retail data reactions, and broader market trends paints a complex picture for the peso. Stakeholders must remain vigilant to upcoming economic indicators and central bank decisions, which will undoubtedly shape currency dynamics in the near future.