Mexican Peso retraces as Banxico eyes further easing in 2025
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Christian Borjon Valencia
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19 Dec @ 08:34 (GMT+0)

Mexican Peso retraces as Banxico eyes further easing in 2025

  • Mexican Peso retreats following Banco de Mexico's decision to reduce rates as expected.
  • Banxico reduced the main reference rate to 10%, highlighting Q3 economic growth and inflation to reach the target in Q3 2026.
  • USD/MXN set for uncertainty as Fed's hawkish cut contrasts with Banxico’s aggressive easing.

The Mexican Peso strengthened against the US Dollar on Thursday after the Banco de Mexico reduced interest rates as expected following the Federal Reserve’s (Fed) Wednesday decision. However, as Friday’s Asian session begins, the USD/MXN trades at 20.34, up by 0.22%.

Banxico unanimously decided to reduce the main reference rate by 25 basis points (bps) to 10.00%, as widely expected by analysts. The central bank added that the balance of risks to growth is tilted to the downside, though the economy expanded at a greater pace in Q3 2024.

Headline and core inflation decreased between November and December, with expectations for 2024 revised downwards. Those for the end of 2025 and the longer-term remained unchanged, and Banxico expects the Consumer Price Index (CPI) to converge to the bank’s 3% goal in Q3 2026.

Banxico’s Governing Board noted that imposing tariffs on US imports from Mexico added uncertainty to the projections. Nevertheless, the bank noted, "The inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”

In the US, the economic docket revealed that the economy grew healthier, exceeding estimates and Q2’s reading, while the number of Americans filing for unemployment benefits dipped.

On Wednesday, the Fed adopted a less dovish stance despite cutting interest rates by 25 basis points (bps), though not unanimously. Fed Chair Jerome Powell hinted that the central bank had shifted slightly more attention to inflation, as seen by the dot plot, with most officials eyeing 50 basis points of easing for 2025.

This week, the Mexican economic docket is absent, while in the US, the release of the core Personal Consumption Expenditures Price Index and the University of Michigan (UoM) Consumer Sentiment poll will occur.

Daily digest market movers: Mexican Peso climbs as USD/MXN drops below 20.35

  • Banxico estimates headline inflation would end 2024 at 4.6%, 2025 at 3.3%, and hit the 3% goal in Q3 2026. Core inflation is projected to end the current year at 3.6%, 2025 at 3.3%, and will hit 3% in Q2 2026.
  • Banxico's December private sector survey forecasts Mexico's inflation to close 2024 at 4.37%, with core inflation easing to 3.60%, down from November’s 3.69%. Economic growth is expected at 1.60%, up from the previous 1.53%, while the USD/MXN exchange rate is projected at 20.25.
  • For 2025, inflation is expected to decline to 3.80%, while core inflation is projected to rise slightly to 3.72%. GDP growth is forecast at 1.12%, lower than November’s 1.20% estimate, and the USD/MXN exchange rate is anticipated to reach 20.53.
  • US Initial Jobless Claims for the week ending December 14 fell to 220K from 242K, beating expectations of 230K and signaling continued strength in the labor market.
  • The US economy grew at an annual rate of 3.1% in Q3, surpassing the 2.8% forecast and slightly higher than the 3% growth in Q2.

USD/MXN technical outlook: Mexican Peso climbs as USD/MXN drops to 20.30

The USD/MXN uptrend remains in place, though it has halted as the Mexican currency appreciates. The exotic pair has failed to clear the 20.50 figure decisively, and it might be set to end the year at around the 20.00-20.50 range as liquidity begins to drain.

If sellers push the USD/MXN below the 50-day Simple Moving Average (SMA) at 20.13, the next support would be the 20.00 psychological figure. A breach of the latter will expose the 100-day SMA at 19.75, before challenging 19.50. For a bullish continuation, buyers must clear 20.20 before testing 20.50. On further strength, the next resistance would be the December 2 daily high of 20.59, followed by the year-to-date peak of 20.82 and the 21.00 mark.

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.