Peso Plummets on Recession Fears After GDP Slump
- Mexico’s Economy Hits Brakes: Q4 GDP Contracts for First Time Since 2021.
- Banxico Growth Forecast Cut: 2025 Outlook Reduced to 0.6%, Significantly Below Government Estimates.
- Mixed Signals from the US: Manufacturing Shows Improvement, Services Sector Enters Contraction.
The Mexican Peso (MXN) weakened against the US Dollar (USD) on Friday, reacting to signs of a cooling Mexican economy in the final quarter of 2024. This slowdown suggests the economic picture might not be as bright as previously thought, especially with lingering uncertainties around US President Donald Trump’s trade plans. Currently, the USD/MXN pair is trading at 20.41, showing a 0.54% increase.
Fresh data from Mexico’s statistics agency, INEGI, revealed that the nation’s economy shrank in the fourth quarter of 2024 – the first contraction since Q3 2021. While the Gross Domestic Product (GDP) figure met quarterly expectations, it fell short when compared to the previous quarter and also missed yearly forecasts.
Adding to the cautious outlook, the latest meeting minutes from Banco de Mexico (Banxico) indicate they anticipate a significant slowdown in growth, now forecasting just 0.6% for 2025. This is a considerable drop from their previous 1.2% projection and pales in comparison to the Mexican Finance Ministry’s more optimistic 2.3% forecast, as well as the 1% predicted by the Citi Expectations Survey.
Against this economic backdrop, the USD/MXN pair appears to have room to climb higher. New data from S&P Global showed some positive news with improved manufacturing activity in the United States. However, this was offset by a sharp drop in the Services PMI, which contracted for the first time since January 2023.
Adding to the mixed economic picture, additional data revealed a significant plunge in Existing Home Sales, and the final University of Michigan (UoM) Consumer Sentiment reading for February showed further weakening consumer confidence.
Market Movers – Daily Digest: Mexican Peso Under Pressure as Economic Outlook Weakens
- GDP Contraction Confirmed: Mexico’s Gross Domestic Product shrank by 0.6% in Q4 2024 compared to the previous quarter, a sharp downturn from the prior 1.1% growth and in line with Reuters poll expectations.
- Annual Growth Disappoints: Looking back at the year, Mexico’s economy expanded by just 0.5% in Q4 compared to 2023, resulting in an overall annual growth of 1.2% for the year – the slowest pace since 2020.
- Policy Paths Diverge: The differing monetary policies of Banxico and the US Federal Reserve (Fed) are likely to push USD/MXN higher. The Fed is expected to hold interest rates steady, while Banxico is anticipated to cut rates by another 50 basis points at their next meeting.
- Trump’s Trade Talk: As of today, US President Donald Trump reaffirmed the imposition of 25% tariffs on cars, slated to take effect on April 2nd.
- Trade Tensions Persist: Trade relations between the US and Mexico remain a key issue. While progress was made earlier, USD/MXN traders should be aware of a temporary 30-day pause in discussions, with potential for renewed tensions as February concludes.
USD/MXN Technical View: Mexican Peso Weakens as USD/MXN Rebounds from 20.20
The USD/MXN pair is showing steady movement, with a slight upward bias. After finding a bottom near the 100-day Simple Moving Average (SMA) around 20.23, buyers stepped in, driving the pair higher. However, the pair is encountering resistance around the 20.40 level, resulting in a generally sideways trading pattern for now.
Looking ahead, should USD/MXN break through the 20.40 resistance, the next potential hurdle is around 20.50, followed by the January 17 high of 20.93. If the upward momentum continues, key resistance levels to watch become 21.00 and the year-to-date (YTD) peak of 21.28. On the flip side, if the pair falls below 20.23, the 20.00 level becomes the immediate target. A drop below that could then open the door to the October 18, 2024 low at 19.64, prior to the 200-day SMA at 19.37.
Mexican Peso FAQs
The Mexican Peso (MXN) stands out as the most actively traded currency in Latin America. Its value is influenced by a combination of factors, starting with the health of the Mexican economy and the policies set by its central bank. Foreign investment flows into the country also play a significant role, as do remittances sent home by Mexicans working abroad, especially in the US. Even global events can have an impact, such as the trend of nearshoring, where companies are moving production closer to their main markets. This is seen as a positive for the Peso as Mexico is becoming a major manufacturing center for the Americas. Finally, as a key oil exporter, fluctuations in oil prices can also move the MXN.
Banxico, Mexico’s central bank, has a primary goal: keeping inflation under control and stable, ideally around 3% (within a target range of 2% to 4%). They use interest rates as their main tool to achieve this. When inflation rises too much, Banxico will try to bring it down by increasing interest rates. This makes borrowing more expensive for both consumers and businesses, which in turn can cool down demand and the overall economy. Generally, higher interest rates are good news for the Mexican Peso (MXN) because they offer investors better returns, making Mexico a more attractive investment destination. Conversely, when interest rates are lowered, it tends to weaken the MXN.
Keep a close eye on macroeconomic data releases – they’re crucial for gauging the health of the Mexican economy and can definitely influence the value of the Mexican Peso (MXN). A robust Mexican economy, characterized by strong growth, low unemployment, and high confidence, is generally positive for the MXN. This positive outlook attracts foreign investment and might even prompt Banxico to raise interest rates, especially if strong economic performance is accompanied by rising inflation. On the other hand, if the economic data paints a weaker picture, the MXN is likely to lose value.
Being an emerging market currency, the Mexican Peso (MXN) typically performs well when investors are in a “risk-on” mood. This happens when they feel market risks are low and are more willing to invest in assets that carry a bit more risk for potentially higher returns. Conversely, when market turbulence hits or economic uncertainties rise, the MXN usually weakens. This is because investors tend to sell off riskier assets like the Peso and move their money into safer investments, often called “safe havens.”
