USD/MXN holds losses near 18.50 following Banxico’s rate cut, US PCE Price Index eyed

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USD/MXN depreciates after two days of gains, trading around 18.50 during the Asian hours on Friday.

USD/MXN could rebound as the Mexican Peso faces pressure amid expectations of additional rate cuts.
Banxico opted for a 25-basis-point rate cut in September amid persistent concerns over global trade tensions.
The US Dollar could receive support as strong economic data may slow the Fed’s interest rate cuts.

USD/MXN depreciates after two days of gains, trading around 18.50 during the Asian hours on Friday. However, the pair may regain its ground as the Mexican Peso (MXN) may face challenges amid expectations of further rate cuts following a 25-basis-point rate cut by the Bank of Mexico (Banxico) on Thursday, as widely expected. Focus shifts toward Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, due later on Friday.

The Banxico decided to bring its interest rate to 7.5%, its lowest level since May 2022, amid ongoing concerns about global trade tensions and sluggish economic growth in the country. The Mexican central bank stated that it considered “weak economic growth” and volatile global trade policies when deciding to lower borrowing costs.

China’s Commerce Ministry on Thursday launched an anti-dumping investigation into pecans imported from the United States (US) and Mexico, highlighting growing global trade tensions with the two North American countries, per Reuters.

The US Dollar (USD) may gain ground as robust economic data may prompt the US Federal Reserve (Fed) to adopt a more cautious approach to cutting interest rates. The US Gross Domestic Product (GDP) Annualized grew 3.8% in the second quarter (Q2), coming in above the previous estimate and the estimation of 3.3%. Meanwhile, the GDP Price Index rose 2.1% in the same period, as compared to the expected and previous 2.0% growth. US Initial Jobless Claims declined to 218K last week, the lowest since July. The market expectations were an increase to 235K from 232K previously.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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.