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Mexican depreciates against US Dollar, amid higher geopolitical concerns, Fed chatter

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  • Mexican Peso faces sharp decline as geopolitical risks escalate, hawkish comments from Boston Fed's Susan Collins weigh on market mood.
  • Speculations of imminent Iranian attack on Israel prompt flight to safety.
  • Fed's Susan Collins revises rate cut expectations, suggesting a cautious approach to monetary easing.

The Mexican Peso plummets sharply against the US Dollar on Friday amid a risk-off impulse on speculation that Iran might attack Israel over the weekend. Alongside surprisingly hawkish comments by Boston Federal Reserve President Susan Collins, these worries derailed the emerging market currency, which could end the week with losses. The USD/MXN trades at 16.68, after hitting a daily low of 16.40, up 1.50%.

US equities are tumbling as sentiment sours. According to CBS News, Israel is bracing for a direct attack on its soil by Iran in retaliation for a strike that killed seven Iranian military officers two weeks ago.

Elsewhere, Boston Fed President Susan Collins said that due to the latest inflation numbers, she expects the Federal Reserve (Fed) to make its first rate cut later than previously thought. She added that she foresees two rate cuts this year instead of the three projected in the Federal Open Market Committee (FOMC) Summary of Economic Projections (SEP).

Daily digest market movers: Mexican Peso falls on risk aversion

  • According to CBS News, two US officials commented “that a major Iranian attack against Israel was expected as soon as Friday, possibly to include more than 100 drones and dozens of missiles aimed at military targets inside the country.”
  • The University of Michigan's preliminary April Consumer Sentiment deteriorated to 7.9, below estimates of 79.0. Inflation expectations for one year rose to 3.1% from forecasts and the previous reading of 2.9%. For five years, they increased from 2.8% to 3.0%.
  • Mexico’s economic docket was scarce on Friday, though crucial data was revealed during the week. On Tuesday, Mexico's Consumer Price Index (CPI) continued its disinflation trend, with both the overall and core CPI decelerating monthly and yearly. This supported the Bank of Mexico's (Banxico) decision to lower interest rates on March 21, although the yearly CPI slightly exceeded expectations.
  • On Thursday, Mexico’s Industrial Production dipped by 0.1% MoM in February, falling short of the expected 0.3% growth. However, it increased by 3.3% in the twelve months to February, missing forecasts by a narrow margin.
  • Across the border, US inflation data was revealed. On Wednesday, US CPI data indicated higher-than-expected inflation, while underlying CPI, excluding food and energy, was steady compared to February’s figures. On Thursday, prices paid by producers, also known as the Producer Price Index (PPI), decreased on monthly and annual figures from the previous month.
  • Initial jobless claims for the week ending April 6 were 211K, lower than the anticipated 215K and the previous week's 222K.
  • This data, coupled with Wednesday's inflation report showing a monthly CPI rise of 0.4% and a yearly increase of 3.5%, has led traders to anticipate two rate cuts by the Federal Reserve in 2024. Data from the Chicago Board of Trade indicates the fed funds rate is expected to finish the year at 4.92%.

Technical analysis: Mexican Peso succumbs to the Greenback, USD/MXN rallies toward 16.60s

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The USD/MXN remains downwardly biased despite printing a leg up toward the 16.70 area. Although buyers have lifted the exchange rate to current levels, they must reclaim the 50-day Simple Moving Average (SMA) at 16.82 to have a chance of challenging the 17.00 figure. Once those two levels are cleared, the next stop would be the 200-day SMA at 17.16 before aiming toward the psychological 17.50 mark.

On the other hand, if the USD/MXN tumbles below 16.50, that could pave the way to challenging October’s 2015 low of 16.32 before retesting the year-to-date (YTD) low of 16.25.

Mexican Peso FAQs

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

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