Mexican Peso Strengthens As Inflation Slows, Economic Data Improves

The Mexican peso is strengthening against some of its peers to close out the trading week, buoyed by slowing inflation and improving macroeconomic data. The peso has been one of the top-performing Latin American currencies in recent months, despite the coronavirus pandemic failing to subside and the public health crisis affecting the region’s second-largest economy.

Last month, the consumer price index (CPI) rose 0.23%, down from the 0.39% increase in August. At an annualized rate, inflation has climbed 4.01%, coming in below market expectations of 4.07%. The core inflation rate, which excludes volatile items like food and energy, increased 0.32% in September, unchanged from the previous month.
Automobile production tumbled 5.5% year-over-year in September, up from -13.2% in August. Motor vehicle exports also slumped 13.1% YoY, down from the 8.6% slide in the previous month.
Although the numbers are falling short of market forecasts, investment in Mexico is improving gradually. In July, gross fixed investment jumped 4.4%, down from the 20.1% gain in June. The gross fixed investment rate is down 21.2% at an annualized pace, up from the 24.2% contraction in June.
Next week, industrial production, mid-month inflation, and retail sales data will be published.
The central bank’s Monetary Policy Committee released the minutes from last month’s meeting. The minutes revealed that policymakers anticipate a long and difficult economic recovery, with ample uncertainty due to weaker consumer demand. At the meeting, officials agreed to cut its benchmark interest rate for the 11^th consecutive month by 25 basis points to 4.25%.
The COVID-19 outbreak continues to hamper the Mexican economy. The country has more than 804,000 confirmed cases, with a death toll of about 81,000. Its daily confirmed cases are between 3,000 and 6,000, but the government is downplaying the high rate of coronavirus infections.
But why would the peso be climbing amid increasing infections of the highly infectious respiratory illness? The broader global financial markets are rallying on developments in US fiscal stimulus, as well as a sliding greenback, giving more of an appetite for risk in emerging market currencies.
The USD/MXN currency pair tumbled 0.98% to 21.1705, from an opening of 21.3875, at 19:02 GMT on Friday. The EUR/MXN slipped 0.38% to 25.0446, from an opening of 25.1486.
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