Mexican Peso Surges on Fed Rate Cut Bets
- The Mexican Peso is gaining strength! USD/MXN is dropping towards the 20.00 mark as expectations grow for the Fed to ease up on interest rates.
- Disappointing data on Mexican factory output was shrugged off as improved market sentiment helped the Peso rise against a weaker US Dollar.
- Tensions are rising over US-Mexico trade! Mexican officials confirm they are in talks ahead of a crucial tariff deadline on April 2nd.
The Mexican Peso (MXN) is having a noticeably strong day against the US Dollar (USD) this Thursday. It seems traders are increasingly betting that the Federal Reserve (Fed) will likely cut interest rates not once, but potentially three times in 2025. Recent positive news on inflation and jobs in the United States has led many to believe the Fed will be more inclined to ease monetary policy, which in turn has put downward pressure on the US Dollar. Currently, USD/MXN is trading at 20.08, a decrease of 0.44%.
On the data front, Mexico’s latest figures were a bit of a letdown, with Industrial Production in January actually contracting. However, it appears a slightly more optimistic mood in the markets is helping emerging market currencies like the Peso, which is continuing to climb as the US Dollar struggles to recover its earlier footing.
Adding to the mix, Mexican Economy Minister Marcelo Ebrard has announced that Mexico and the US are in serious discussions about potential US tariffs. The threat of a 25% tariff on all goods from Mexico, a major trading partner, looms large with an April 2nd deadline.
Just yesterday, Mexican Finance Minister Edgar Amador Zamora pointed out that while the Mexican economy is still growing, there are signs of a slowdown. He specifically linked this to the ongoing trade tensions with the United States.
Looking north of the border, US economic data revealed that prices at the factory gate remained largely unchanged, with just a tiny dip. Interestingly, investment bank Goldman Sachs suggested that some inflation measures used to calculate the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, might actually indicate underlying price pressures.
Based on the latest CPI and PPI figures, Goldman Sachs estimates that February’s Core PCE could show a 0.29% increase, translating to an annual rate of 2.7%.
Other US data suggests the jobs market remains healthy. However, overall economic figures continue to paint a somewhat subdued picture, partly attributed to US President Donald Trump’s tough talk on trade.
Daily digest market movers: Mexican Peso shrugs off weak factory data
- Mexico’s Industrial Production surprised to the downside in January, shrinking by 0.4% month-over-month, falling short of the expected 0.2% growth. Year-over-year, factory output plunged 2.9% in January, also worse than anticipated and a further decline from December’s 2.7% drop.
- Economists at Banco de Mexico (Banxico) predict a significant slowdown for the Mexican economy, now forecasting growth of just 0.81%. This slower growth, coupled with progress in lowering inflation, is expected to push Banxico to cut interest rates at their upcoming meeting on March 27th.
- February’s US Producer Price Index (PPI) came in a bit softer than anticipated, rising 3.2% year-over-year, below the 3.3% forecast and down from 3.7% the previous month.
- Stripping out volatile food and energy prices, the Core PPI still edged up 3.4% year-over-year, missing the 3.5% estimate and easing slightly from January’s 3.6%.
- Despite recent encouraging inflation reports, economists are cautioning that potential tariffs on US imports could reignite inflationary pressures in the months ahead.
- For the week ending March 8th, Initial Jobless Claims in the US dipped slightly to 220,000, better than the 225,000 expected and an improvement from the previous week’s 222,000.
- Traders in the money markets are currently pricing in expectations that the Federal Reserve (Fed) will cut interest rates by 74 basis points by the end of the year.
- A recent Reuters poll of economists revealed that a significant majority, 70 out of 74, believe the risk of recession has increased in the US, Canada, and Mexico.
- The ongoing trade disputes between the US and Mexico are still a major concern. A resolution could boost the Mexican currency, while failure to reach an agreement, leading to US tariffs, could potentially push Mexico into a recession and further weaken the Peso.
USD/MXN technical outlook: Mexican Peso gains momentum as USD/MXN breaks below 20.10
The technical picture for USD/MXN has shifted from neutral to leaning downwards. Sellers are now eyeing a test of the key psychological level of 20.00. If this level breaks, the next target could be the 200-day Simple Moving Average (SMA) around 19.63, before potentially falling further to 20.50. On the other hand, if the pair can decisively break above 20.20, it might get stuck in the 20.20 – 20.50 range again, before buyers have a chance to challenge the March 4th peak of 20.99.
Mexican Peso FAQs
The Mexican Peso (MXN) stands out as the most actively traded currency in Latin America. Its value is influenced by a range of factors closely tied to Mexico’s economic health. This includes how well the Mexican economy is performing overall, the policies set by the country’s central bank, the amount of foreign investment flowing into Mexico, and even the money sent home by Mexicans living abroad, especially in the United States. Global events also play a role; for instance, the increasing trend of “nearshoring” – where companies are moving production closer to their home markets – is seen as a positive factor for the Peso, as Mexico is a key location for manufacturing in the Americas. Furthermore, oil prices matter because Mexico is a significant exporter of crude oil.
The primary goal of Mexico’s central bank, Banco de Mexico (Banxico), is to keep inflation low and stable, ideally around their target of 3% (within a range of 2% to 4%). To achieve this, Banxico uses interest rates as a tool. If inflation is too high, they will try to bring it down by raising interest rates. This makes borrowing more expensive for households and businesses, which in turn cools down demand and the economy overall. Higher interest rates are generally good news for the Mexican Peso (MXN) because they offer investors better returns, making Mexico a more attractive place to invest. Conversely, lower interest rates tend to weaken the Peso.
Key macroeconomic data releases are crucial for understanding the state of the Mexican economy and can significantly impact the value of the Mexican Peso (MXN). A strong Mexican economy, characterized by solid economic growth, low unemployment, and high business and consumer confidence, is generally positive for the Peso. This not only attracts more foreign investment but might also encourage Banxico to raise interest rates, particularly if strong growth is accompanied by rising inflation. However, if economic data is weak, the Peso is likely to lose value.
As a currency from an emerging market, the Mexican Peso (MXN) typically performs well during “risk-on” periods. This is when investors feel that the overall level of risk in the markets is low and are more willing to invest in assets that might carry higher risk but also potentially offer higher returns. Conversely, the Peso tends to weaken when markets become turbulent or economic uncertainty rises. In these “risk-off” scenarios, investors often sell off riskier assets and move their money to safer, more stable investments like traditional safe-haven currencies.
