On Friday, the Mexican Peso (MXN) put on an unexpected show of strength against the US Dollar (USD). This came despite a slew of lackluster economic data from Mexico during the week, which painted a rather grim picture of the country’s economic health. The USD/MXN exchange rate tumbled below 19.90, marking a drop of over 1%, and was trading at 19.86 as of the latest figures. This upward movement in the peso has put it on track for weekly gains, much to the surprise of many in the financial world.
Mexico’s economic indicators have been less than encouraging. Industrial production in the country took a nosedive, plunging to -2.9% year-on-year, which is even worse than December’s already dismal -2.7% decline. Consumer confidence has also taken a hit, deteriorating further and stoking fears of a potential recession. Banco de Mexico (Banxico) Director of Economic Research, Alejandrina Salcedo Cisneros, warned that the current uncertainty is casting a shadow over the country’s businesses. Banxico has even estimated economic contractions across all regions in Mexico, with the nation’s growth in the fourth quarter dropping by -0.6% compared to the previous quarter, based on seasonally-adjusted figures.
US Consumer Sentiment: A Catalyst for Peso’s Rise
While Mexico was grappling with its economic woes, the situation in the United States also played a significant role in the peso’s performance. The University of Michigan (UoM) Consumer Sentiment Index showed a sharp decline in March, dropping from 64.7 to 57.9, well below the forecast of 63.1. What’s more, inflation expectations in the US shot up. Americans now expect 12 – month inflation to rise from 4.3% to 4.9%, and over a five – year period, they anticipate prices to run at 3.9%, up from 3.5%. This was largely driven by the upcoming Trump administration tariffs. The weakening consumer sentiment in the US exerted downward pressure on the US Dollar, causing it to be on track for weekly losses and providing a major boost to the Mexican Peso.
Market Expectations and Policy Outlook
Traders and investors are now keeping a close eye on next week’s Federal Reserve (Fed) policy decision. Fed Chair Jerome Powell had previously revealed that “market measures of inflation expectations have moved up, driven by tariffs.” Next week, in addition to the Fed’s decision, market watchers will also be looking at retail sales, housing data, and the Fed’s economic projections.
In the money market, futures traders have adjusted their expectations. They now price in 67 basis points of easing by the Fed toward the end of the year, down from 74 a day ago. Meanwhile, in Mexico, Banxico is expected to continue its policy of easing at the March 27 meeting. This is spurred by the disinflation process and a stagnant economy. Mexican Finance Minister Edgar Amador Zamora had also commented that while the national economy is expanding, it shows signs of slowing down, mainly due to trade tensions with the US.
A Reuters poll indicated that the risk of recession has increased in the US, Canada, and Mexico, with 70 out of 74 economists sharing this view. The trade disputes between the US and Mexico remain a crucial factor. If the two countries can reach an agreement, it could potentially set the stage for a recovery of the Mexican currency. However, if the disputes persist and US tariffs are implemented, it could trigger a recession in Mexico, leading to further upward movement in the USD/MXN exchange rate.
Technical Outlook for USD/MXN
From a technical perspective, the USD/MXN has broken an important level. It finally cleared the 20.00 mark, hitting a four – month low of 19.84 earlier during the North American session. The Relative Strength Index (RSI) is showing a bearish trend and has entered oversold territory, indicating that the momentum is in favor of further downward movement for the pair. The first support level for the USD/MXN is at the 200 – day Simple Moving Average (SMA) of 19.67. If this level is breached, the next support could be at 19.50, followed by the September 18 swing low of 19.06. On the other hand, for a bullish reversal, the first resistance level for the pair is at 20.00. A decisive break above this level would expose the 100 – day SMA at 20.35.
In conclusion, the Mexican Peso’s recent rally against the US Dollar is a complex phenomenon, influenced by a combination of domestic economic factors in Mexico, US economic developments, and market expectations. As the situation unfolds, investors and traders will be watching closely for any new developments that could impact the exchange rate.
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