Weak Growth Outlook for Mexico
A key factor affecting the Mexican Peso is the outlook for the country’s economic growth. The International Monetary Fund (IMF) recently reaffirmed its pessimistic GDP growth forecast for Mexico in 2024, projecting a mere 1.5% increase. This estimate aligns with Q1’s growth figures but is well below Q2’s stronger 2.1% rise. As a result, expectations for the second half of 2024 remain weak, further dampening optimism around the Peso.
Looking ahead, the IMF has also slashed its growth forecast for 2025 to 1.3%, significantly lower than the Bank of Mexico’s (Banxico) 3.0% target. By 2026, the IMF expects growth to improve slightly to 2.1%, though this is still below Banxico’s expectations. If these projections hold, Mexico’s growth challenges will likely lead to further disinflation and may encourage Banxico to adopt a more aggressive rate-cutting stance.
Banxico and Interest Rate Outlook
The prospect of lower growth is already influencing market expectations regarding Banxico’s monetary policy. Economists are pricing in a 50-basis-point (0.50%) rate cut by the end of 2024, which would bring Mexico’s main interest rate down to 10.00%. While this might help stimulate the domestic economy, it would likely diminish the Peso’s appeal to foreign investors, leading to decreased capital inflows and further weakening the currency.
Lower interest rates tend to make a currency less attractive for carry trades, as investors typically favor higher-yielding assets. With other central banks, such as the Federal Reserve, potentially slowing their pace of cuts or even maintaining rates, the interest rate differential could shift in favor of the US Dollar (USD), adding more downside pressure on the Peso.
Key Data to Watch: Mexican Retail Sales and Inflation
The spotlight this week is on Mexico’s August Retail Sales data, set to be released on Wednesday. Analysts are expecting an annual decline of 0.4% and a modest monthly rise of 0.2%. This follows weak Mexican Economic Activity data released earlier in the week, which fell short of expectations and hinted at a slowing economy.
Retail Sales will be followed by inflation data on Thursday, which could further influence Banxico’s policy decisions. If inflation continues to trend downward, it may reinforce expectations for further rate cuts, putting additional pressure on the Peso.
Technical Outlook: USD/MXN in a Range, But Long-Term Uptrend Intact
Technically, the USD/MXN pair remains range-bound just below the key resistance level of 20.00. Despite this short-term consolidation, the long-term outlook remains bullish as the pair continues to trend upward. According to technical analysis, the principle of “the trend is your friend” suggests that a breakout to the upside is more likely once the current consolidation phase ends.
Conclusion
The Mexican Peso faces significant headwinds in the form of weak economic growth, lower interest rate expectations, and global risk aversion. As the Mexican economy continues to struggle, Banxico may be forced to cut rates more aggressively, further weakening the Peso. Traders will closely watch upcoming economic data, especially Retail Sales and inflation, for signs of how Banxico might adjust its policy and how the Peso will respond.
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