- Mexican Peso extends its rally, capitalizing on a weaker USD.
- Mexico’s GDP growth aligns with expectations and might refrain Banxico’s officials from easing monetary policy.
- Mixed US economic data, with improving business activity but a downturn in Manufacturing PMI, weighed on the USD/MXN pair.
Mexican Peso (MXN) prolongs its gains against a softer US Dollar (USD) as North American traders get back from Thanksgiving for a shortened session, though they failed to boost the latter. Treasury bond yields in the United States (US) rose while interest rate cuts odds by the US Federal Reserve (Fed) were pushed back. Meanwhile, Mexico’s economy grew as expected, a headwind for the USD/MXN, trading with losses of more than 0.50%.
The National Statistics Agency (INEGI) revealed the Gross Domestic Product (GDP) rose as expected on an annual basis and exceeded forecasts in a 90-day period. That could prevent Bank of Mexico (Banxico) officials from adopting a dovish stance after the minutes showed policymakers estimated a rate cut in the first quarter of 2024.
On the US front, business activity showed signs that it remains improving, according to the S&P Composite and Services PMI. The outlier was Manufacturing, which dropped into recessionary territory.
Daily digest movers: Mexican Peso helped by solid economic growth and a steady disinflation process
- Mexico’s GDP growth for Q3 came at 3.3% YoY, as foreseen, exceeding the previous reading. Quarterly basis rose by 1.1%, peaking forecasts and the previous figures of 0.9% and 0.8%, respectively.
- The Mexican Consumer Price Index (CPI) for mid-November annually increased by 4.32%, exceeding estimates of 4.31%.
- US S&P Global Services and Composite PMIs came at 50.8, exceeding estimates, and at 50.7, above forecasts, unchanged from the previous report.
- Manufacturing activity revealed by US S&P Global, witnessed the index dropping from 50 to 49.4, below estimates of 49.8.
- Core CPI in Mexico decelerated compared to previous data and slowed to 5.31%, below forecasts of 5.33%.
- A Citibanamex poll suggests that 25 of 32 economists polled expect Banxico’s first rate cut in the first half of 2024.
- The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
- The same survey revealed that economists foresee headline annual inflation at 4% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024
- Data published last week showed prices paid by consumers and producers in the US dipped, increasing investors’ speculations that the Fed’s tightening cycle has ended.
- The swap market suggests traders expect 84 basis points of rate cuts by the Fed in 2024.
Technical Analysis: Mexican Peso in the driver’s seat, as USD/MXN threatens to close the week below 17.10
The USD/MXN pair was undermined by upbeat economic data, which pushed the pair below the 17.10 mark, reaching a three-day low of 17.08. The bias remains downward, and the pair could extend its losses if it breaches the November 21 swing low of 17.06. If that level is surrendered, a test of 17.00 is on the cards.
On the other hand, if buyers reclaim 17.20, that could facilitate a jump to the 100-day Simple Moving Average (SMA) at 17.34. Once buyers regain that supply zone, further upside could be witnessed at the 20-day SMA at 17.46.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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