The Mexican Peso (MXN) continues to hold its ground as the most traded currency among its Latin American peers. Despite facing challenges such as high US inflation and trade disputes, the Peso has shown resilience. Its value remains influenced by the performance of the Mexican economy, central bank policies, foreign investments, and remittances from abroad. On Thursday, the MXN gained modestly against the US Dollar (USD) as inflation data from the United States indicated prices above the Federal Reserve's 2% target.
The Mexican economy plays a pivotal role in determining the Peso's value. A strong economic foundation characterized by high growth, low unemployment, and robust confidence bolsters the currency. The Central Bank of Mexico (Banxico) is integral to this process, often raising interest rates to combat inflation—a move that tends to appreciate the MXN. Higher interest rates lead to higher yields, making Mexico an attractive destination for investors.
Banxico's main objective is to maintain low and stable inflation levels, targeting a midpoint of 3% within a 2%-4% tolerance band. The MXN, being an emerging-market currency, thrives during risk-on periods when broader market risks are perceived as low. Currently, the USD/MXN pair consolidates near the 50-day Simple Moving Average (SMA) at around 20.50, displaying no clear bias over the past week.
Recent data revealed that the US Producer Price Index (PPI) increased by 0.4% month-on-month in January, surpassing forecasts of 0.3%, yet down from 0.5% in the previous period. Additionally, the US Bureau of Labor Statistics reported a strong labor market, with fewer Americans filing for unemployment benefits for the week ending February 8. Despite these positive indicators from the US, trade disputes between the US and Mexico continue to simmer.
The economic policies of the Trump administration are beginning to take shape and could impact these trade relations further. However, Fed Chair Powell remarked on the status of inflation, stating:
"We are close but not there on inflation," – Fed Chair Powell
This ongoing uncertainty about inflation and trade disputes affects investor sentiment and the Peso's performance.
In Mexico, although Banxico's policies support the currency, the economy faces challenges. The automotive industry is experiencing a downturn, and recent Industrial Production figures have been worse than expected. These factors contribute to a more precarious economic situation than anticipated.
Furthermore, market expectations indicate that the Federal Reserve will implement rate cuts totaling 35 basis points (bps). Traders have thus delayed their expectations for the first cut from June to September. Such decisions in US monetary policy can indirectly affect the MXN by altering investment flows and risk perceptions.
As investors navigate these complex dynamics, they are closely monitoring both Mexican and US economic indicators. For Mexico, maintaining investor confidence hinges on Banxico's ability to manage inflation effectively while supporting growth amid external pressures.