Mexican Peso (MXN) Fluctuates Following Central Bank Decision

On Friday the Pound to Mexican Peso exchange rate jumped from a low of 22.2124 to a high of 22.4072 in response to Mexico’s Central Bank interest rate decision. The USD/MXN currency pair, meanwhile, also advanced from 14.782 to 14.8913 ahead of the publication of US fourth quarter growth data. Although many other central banks (including the European Central Bank, Swiss National Bank and Bank of Canada) have made surprising policy adjustments in recent weeks, the Mexican Central Bank did not follow this trend. The key interest rate was held at a record low of 3.0%, as expected by economists. The Governor of the central bank, Agustin Carstens, insinuated that the much weaker Peso may push consumer prices higher and that adjustments to borrowing costs are therefore unwarranted for the time being. However, he then added that spending cuts may have to be made in response to the extensive slide in oil prices and the subsequent 12% drop in the Peso.

Carstens stated; ‘It is really not necessary to adjust interest rates at the moment. [...] If the adjustment (in spending) is not made and financial stability in the country deteriorates, that would lead to higher interest rates, more exchange rate volatility, possibly higher inflation, and I think it still would have a worse impact on economic growth.’

However, the Peso could recover some of its recent losses against the US Dollar in the hours ahead in response to the fourth quarter growth figures from the US. The US economy was expected to expand by 3.0% in the fourth quarter of the year on an annualised basis, down from growth of 5.0% in the third quarter. The world’s largest economy actually expanded by 2.6% and the slower-than-expected growth could deter the Federal Reserve from increasing interest rates in the first half of this year.
Next week Mexican data with the potential to provoke Peso movement includes the HSBC Manufacturing PMI (believed to have increased from 55.3 to 55.5) the nation’s business confidence index and consumer confidence measure. Of course, fluctuations in the commodities market and US economic reports will also have an impact on the currency. Investors will be paying particularly keen attention to the US Non-Farm Payrolls report. A surge in job growth would be US Dollar supportive.