Mexican Peso Declines as Weekly Depreciation Surpasses 1.30% Amid Economic Concerns
The Mexican Peso has continued its downward trend for the second consecutive day, with the USD/MXN exchange rate reaching a peak of 19.74. This depreciation comes in the wake of the Bank of Mexico's (Banxico) decision to lower interest rates to 10.50%, reflecting a cooling economic activity and rising inflation projections for 2024.
On Friday, the Peso lost ground against the US Dollar, trading at 19.72, marking a 0.50% increase for the USD. This decline occurred despite a slight decrease in the US Personal Consumption Expenditures (PCE) inflation, which is a key indicator for the Federal Reserve. The core PCE, which excludes volatile food and energy prices, remains stable within the Fed's target range of 2% to 3%.
Recent data from the US Bureau of Economic Analysis indicated a decline in Personal Spending and Personal Income, while the University of Michigan's Consumer Sentiment index for September showed a slight improvement in consumer confidence.
In Mexico, Banxico's decision to cut interest rates from 10.75% to 10.50% was made in a 4-1 vote, with Deputy Governor Jonathan Heath dissenting. Officials at Banxico acknowledged the weakening economic activity, which is impacting the labor market. They have revised their inflation expectations upward for both headline and core inflation for 2024, although they maintain that inflation will reach the target by the end of 2025.
Despite the upward revision of inflation expectations, Banxico stated that the nature of the shocks affecting the non-core component will continue to dissipate over the coming quarters. They emphasized that while a restrictive monetary policy stance is still necessary, the current economic conditions warrant a reduction in the level of monetary restriction.
Additionally, Mexico's Balance of Trade reported a deficit of $-4.86 billion in August, significantly larger than the $-0.5 billion anticipated, further exerting pressure on the Peso.
Political stability appears to be returning as market participants prepare for the presidential transition on October 1, coinciding with a bank holiday in Mexico. The upcoming speech by President-Elect Claudia Sheinbaum is highly anticipated for insights into her economic strategy.
Key economic indicators include:
- The US PCE inflation rate for August decreased to 2.2% year-over-year, down from 2.5%.
- Core PCE inflation edged up from 2.6% to 2.7%.
- The University of Michigan Consumer Sentiment index improved from 69.0 to 70.1, with inflation expectations slightly adjusting.
Market expectations suggest that Banxico may lower borrowing costs by 175 basis points by the end of 2025, while the US Dollar Index (DXY) remains stable at 100.50. Market participants are anticipating at least a 25 basis points rate cut by the Federal Reserve, with a 54.7% probability for a 50 basis points cut, down from 60% two days prior.
The USD/MXN has resumed its upward trajectory, reaching a daily high of 19.74 following the release of economic data from both Mexico and the US. The Relative Strength Index (RSI) indicates bullish momentum, suggesting potential further gains for the USD/MXN. The immediate resistance level is the week’s high of 19.75, with subsequent targets at 19.84 and the year-to-date high of 20.22.
Conversely, if the USD/MXN fails to break through the 19.75 resistance, it may lead to a decline, with initial support at 19.50, followed by 19.23 and the September 18 low of 19.06. A breach of these levels could see the exchange rate approach the 19.00 mark.