Mexican Peso rallies as Fed rate cut bets weaken the US Dollar

In the world of finance, the Mexican Peso has been tightening its grip against the US Dollar for a second day running. This is chiefly due to the rising speculation that the Federal Reserve might be passing the hat for a 25 basis point interest rate cut, bringing it to a sterling 85.9% probability. It’s all happening against a backdrop of economic headwinds both in Blighty and across the pond.

In the United States, figures from the Bureau of Labor Statistics are indicating a gradual pinch in producer prices, suggesting the expected disinflation. But what’s stirring the pot further is the tepid sentiment echoed by the University of Michigan’s Consumer Sentiment, even as inflation expectations tiptoe upwards.

Meanwhile, south of the border, light has been shed on a stark contraction in Mexican Industrial Production. The contraction not only paints a rather gloomy picture of the nation’s economic canvas but also gives credence to calls for less restrictive monetary measures from the venerable Bank of Mexico (Banxico). The bank’s recent minutes seem to align with the notion that a softer economic stance is warranted.

Economic Highlights:

  • In August, Mexico’s Industrial Production skimmed the bottom with a -0.5% monthly dip, not quite hitting the target nor living up to July’s modest increase of 0.2%.
  • The Mexican Peso, unfazed, continues to rally partly due to dwindling interest rate differentials against the US.
  • According to Banxico’s forecast, the central bank might trim rates by a neat 50 basis points to 10% for the rest of 2024. The USD/MXN is then expected to hover around 19.69.

The momentum of the USD/MXN exchange rate is hinting at sellers holding sway. If the value sinks below the recent 19.10 mark set on October 4, it may pave the way to the next landmark support at 19.00.

Taking a measured step back, the US Dollar Index (DXY) maintains its poise at 102.84, limiting advancements of the USD/MXN. Should the tide turn, pushing the exchange above the 19.50 threshold, the next goalpost could be last seen during the highs of October’s first day at 19.82.

Further Analyses:

  • The Mexican Peso remains quite the charmer among Latin American currencies. This is thanks to heavyweights like the Mexican economy’s performance, Banxico’s policy, and even the winds of geopolitical trends like nearshoring.
  • Higher interest rates, often spurred by Banxico to tackle inflation, tend to bolster the Peso as investors seek the higher returns.
  • A strong economic showing with healthy growth and employment figures usually beckons foreign investment, favouring a Peso appreciation.

To conclude, these developments reveal a mosaic of economic intricacies shaping the Peso’s fate. Should you be keen on sifting through more data, keep an eye peeled for the macroscopic shifts that could stir the waters of international finance.