Mexican Peso prolongs gains on strong demand, Banxico’s decision, and soft US inflation


  • Mexican Peso aims to recover further as Mexico’s central bank doesn’t foresee rate cuts.
  • Mexico’s economic docket will report its Fiscal Balance on Friday.
  • USD/MXN triggered a sell-off after closing below 17.60 on Thursday as the pair slides below 17.40.

The Mexican Peso (MXN) stages a strong comeback versus the US Dollar (USD) after the Bank of Mexico – also known as Banxico – kept rates unchanged, disregarded possible rate cuts in 2023, and revised up its inflation projections until 2025. Hence, the USD/MXN pair has broken strong support, seen at 17.50, and hovers around the 17.40s area.

The USD/MXN retracement is also sponsored by data from the United States (US) following the release of the US Federal Reserve (Fed) preferred inflation gauge, the Core Personal Consumption Expenditure (PCE) Price Index. US Core PCE inflation slid below 4% to 3.9% YoY in August as expected, sparking speculation the Fed could forgo an interest rate hike. In the meantime, BBVA updated Mexico’s Gross Domestic Product (GDP) for 2023 and 2024, with an optimistic 3.2% from 2.4% this year and 2.6% from 1.8% next year.

Daily Digest Market Movers: Mexican Peso gains traction as USD/MXN falls below 17.40

  • The Bank of Mexico (Banxico) held rates at 11.25% and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
  • Banxico’s Government Board highlighted Mexico’s economic resilience and the strong labor market as the main drivers to keep inflation at the current interest rate level.
  • Mexico’s Unemployment Rate edged lower from 3.1% in July to 3.0% MoM in August, according to the National Statistics Agency (INEGI).
  • September’s first-half inflation report in Mexico was 4.44%, down from 4.64% in August, according to INEGI.
  • Being an emerging market currency, the Mexican Peso weakens amid risk aversion. Therefore, news emerging of a possible US Government shutdown triggered a flow toward safe-haven assets, weakening the Mexican Peso.
  • The drop in Oil prices weighs on the Mexican currency, as its economy relies on crude exports.
  • Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
  • In July, Moody’s lowered Mexico’s rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
  • Broad Greenback weakness undermines the USD/MXN pair, as the US Dollar Index (DXY) drops below 106.00 at around 15:00 GMT.

Technical Analysis: Mexican Peso

The Mexican Peso (MXN) found its foot after depreciating to 17.81 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.84. The USD/MXN is accelerating its downtrend after closing below 17.60, with sellers eyeing a push below the 20-day Simple Moving Average (SMA) at 17.32. If that level is lost, the USD/MXN pair would test the 100-day SMA at 17.18, followed by the 50-day SMA at 17.10. If the exotic pair manages to remain above the September low of 16.99, it could resume the one-month upmove.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.