Mexican Peso (MXN) climbs against the US Dollar (USD) during the North American session on Friday, although data from the United States (US) showed the labor market is not as soft as suggested by previously released data during the week. Consequently, traders pared bets on rate cuts by the US Federal Reserve (Fed) for the next year while the Greenback rose. Nevertheless, the Mexican currency remains strong in the day, with the USD/MXN trading at 17.35, losing 0.55% on the day, though in the week, the exotic pair rate finishes with gains of 1.20%.
Mexico’s economic docket revealed that inflation on the producer side was softer compared to October’s data, revealed the National Statistics Agency (INEGI). That reinforces the thesis that prices are slowing down, which leaves the Bank of Mexico (Banxico) officials scratching their heads as consumer inflation rises.
Across the border, the US Bureau of Labor Statistics (BLS) revealed the labor market remains strong, with the economy adding more jobs than estimated by market participants, pushing the Unemployment Rate further away from projections of the Federal Reserve. Besides that, USD/MXN traders are eyeing the Federal Reserve’s next week’s meeting, along with the release of US inflation data.
The USD/MXN shifted gears and is sliding below the 100-day Simple Moving Average (SMA), which lies at 17.39, suggesting that sellers are in charge but they would need a daily close below that level to extend its losses. The first support level is seen at the current week’s low of 17.16, followed by the area within the 17.00/05 range.
On the other hand, if USD/MXN buyers reclaim the 100-day SMA, that could open the door to challenging the 17.50 psychological level. A breach of the latter will expose the 200-day SMA at 17.55 will be exposed, followed by the 50-day SMA at 17.67.
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.