Peso Weakens as Dovish Banxico Bets Overshadow Strong Retail Sales
- Mexican Peso dips 0.24% despite weaker US Dollar as expectations rise for a Banxico rate cut.
- Retail Sales show surprising strength, yet economic slowdown fuels anticipation of accommodating monetary policy.
- Citi survey forecasts Banxico to slash rates by 50 bps this week; market focus also on upcoming US PCE inflation figures.
The Mexican Peso (MXN) started trading on a softer footing against the US Dollar (USD) in early Tuesday trading across North America. Even after a robust Retail Sales report for January, released by Mexico’s statistical agency, INEGI (Instituto Nacional de Estadística, Geografía e Informática), the emerging market currency struggled to gain momentum. As of writing, the USD/MXN exchange rate is currently at 20.07, marking a 0.24% increase.
What’s interesting is that the Peso remains under pressure even as the US Dollar itself is weakening, as indicated by the US Dollar Index (DXY). The DXY, which gauges the dollar’s strength against a basket of six major currencies, is down by 0.23% and currently lingering around the 104.00 mark.
While INEGI’s data revealed that Mexican consumers continue to spend at a healthy clip, as evidenced by the Retail Sales numbers, the economic contraction observed in January, coupled with a dip in inflation during mid-March, has significantly heightened the likelihood that Banco de Mexico (Banxico), Mexico’s central bank, will decide to trim interest rates by a substantial 50 basis points (bps) at its upcoming Thursday meeting. This potential cut would bring the rate down from 9.50% to 9%.
Adding to these expectations, the Citi Expectations Survey indicated that a large portion of private sector economists are now predicting a 50 basis point reduction in rates by Banxico. According to this survey, the forecast for Mexico’s benchmark interest rate at the end of 2025 is now 8%, a slight decrease from the previous estimate of 8.25%.
In light of this backdrop, it appears there’s potential for further upward movement in the USD/MXN pair. However, a possible game-changer could be if US President Donald Trump were to grant tariff exemptions to Mexico. Such a move could boost the Mexican economic outlook, potentially strengthening the Peso and putting downward pressure on this exotic currency pair.
Looking ahead to the rest of the week, Mexico’s economic calendar will feature releases on the Balance of Trade and, crucially, Banxico’s interest rate decision. Across the border in the US, the economic spotlight will be on the release of the Fed’s preferred inflation indicator, the core Personal Consumption Expenditures (PCE) Price Index.
Daily market digest: Mexican Peso slips as Banxico rate cut appears increasingly likely
- Mexican Retail Sales for January showed a respectable 0.6% month-over-month growth, accelerating from December’s 0.1% and surpassing expectations of 0.1%. Over the twelve months to January, sales jumped by 2.7%, a significant turnaround from a 0.2% contraction previously, and soundly beating forecasts of 1.1%.
- On Monday, the Consumer Price Index (CPI) for the first half of March came in lower than anticipated, both on a monthly and annual basis. Encouragingly, core inflation remained within Banxico’s target range of 3% plus or minus 1%.
- The latest Citi Mexico Expectations Survey revealed that analysts now anticipate interest rates to settle at 8% by the close of 2025, down from 8.25% in the previous survey. The USD/MXN exchange rate forecast for the end of the survey period is now 20.98, slightly lower than the previous prediction of 21.00.
- Inflation expectations continue to hover around the high 3% level, while GDP growth is now projected at 0.6%, a slight downward revision from 0.8% in the last survey.
- Market traders are currently pricing in expectations of the Federal Reserve easing monetary policy by 65 basis points (bps) throughout the year, according to data from the Chicago Board of Trade.
USD/MXN technical outlook: Mexican Peso loses ground as USD/MXN breaks above 20.10
Trading in the USD/MXN pair has been somewhat erratic recently, with price action consolidating within a relatively tight 20.00–20.20 range for the past few days. Neither buyers nor sellers have managed to decisively break out of this range. Notably, the pair seems to be leaning towards a downward trend after sellers successfully pushed through key support levels offered by the 50 and 100-day Simple Moving Averages (SMAs) at 20.38 and 20.22 respectively. This breakdown has intensified the existing downtrend below the 20.20 level.
For the bearish momentum to continue, a clear break below the 20.00 threshold is essential. If this level is breached, there isn’t much in the way to prevent a test of the 200-day SMA currently around 19.70, followed by the swing low from September 18 at 19.06. On the flip side, if buyers manage to push prices above the 20.20 mark, the USD/MXN pair would be in a position to challenge the convergence area of the 100 and 50-day SMAs, before potentially targeting the 20.50 region.
Mexican Peso FAQs
The Mexican Peso (MXN) stands out as the most actively traded currency among its Latin American counterparts. Its value is largely influenced by various factors, including the health of the Mexican economy, the monetary policy decisions of the country’s central bank, the level of foreign investment flowing into Mexico, and even the amount of remittances sent home by Mexicans living abroad, particularly in the United States. Geopolitical events can also play a role in MXN’s movements. For instance, the growing trend of nearshoring – where companies choose to relocate their production and supply chains closer to their home markets – is seen as a positive catalyst for the Mexican currency, as Mexico is viewed as a key manufacturing hub in the Americas. Furthermore, oil prices are another factor that can impact MXN, as Mexico is a significant exporter of this commodity.
The primary goal of Mexico’s central bank, Banco de México (Banxico), is to maintain inflation at consistently low and stable levels, ideally around its target of 3%, within a tolerance band of 2% to 4%. To achieve this, the bank uses interest rates as a tool. When inflation is running too high, Banxico typically tries to curb it by raising interest rates. This makes borrowing more expensive for both households and businesses, which in turn cools down demand and the overall economy. Generally, higher interest rates are favorable for the Mexican Peso (MXN) as they lead to higher yields, making Mexico more attractive for investors. Conversely, lower interest rates tend to weaken the MXN.
Key macroeconomic data releases are crucial indicators of the economy’s condition and can significantly affect the valuation of the Mexican Peso (MXN). A strong Mexican economy, characterized by robust economic growth, low unemployment, and strong consumer and business confidence, is generally positive for the MXN. It not only attracts greater foreign investment but may also encourage Banxico to raise interest rates, especially if this economic strength is accompanied by rising inflation. However, if economic data points to weakness, the MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to perform well during periods of “risk-on” sentiment, meaning when investors perceive lower risks in the broader market environment and are more willing to invest in assets that carry higher risk but potentially higher returns. Conversely, the MXN tends to weaken during times of market uncertainty or economic turmoil, as investors often sell off riskier assets and seek refuge in more stable, safe-haven investments.
