The peso targets the support of 19 units ahead of the Fed’s announcement

The scenario that investors had dreamed of all year was confirmed. Jerome Powell, president of the Federal Reserve (Fed), announced on Wednesday that the central bank could begin to moderate rate hikes in December. A new dynamic among investors began to take shape.

It was not only the jump in the stock markets observed after his speech (which took the Dow Jones index to a maximum not seen since April), the dollar lost ground strongly against its main peers and did so the next day until reach a minimum that has not been touched since the beginning of August.

“What we are seeing is a strong movement in the dollar because the market is discounting what other Fed officials had already mentioned and which Powell came to confirm: interest rates could rise at a slower pace,” said Jorge Adrián Calderón, trader of derivatives of Masari Casa de Bolsa.

The new levels, tested

On Thursday, the markets showed mixed behavior, trying to validate the new levels they reached after Powell’s words and given the new monetary policy scenario. This occurs despite the fact that the official warned that the terminal rate of the cycle could be higher than expected.

The fact that inflation slowed in the United States in October contributed greatly to sustaining these hints of optimism. With data of 6% year-on-year compared to 6.3% in September and the monthly rate at 0.3%, the chances are greater that the Fed will decide to raise the rate by 50 basis points in December.

“The decrease in inflation shocks supports the thesis of an increase of 50 basic. This is the most likely option for now,” added Calderón, who also considered that investors will be cautious before the December announcement, which would be preceded by a period of volatility.

Peso would seek new lows

The new scenario for interest rates opens the possibility of the period of strength of the Mexican currency extending for a longer time. The currency has shown resilience thanks to the fact that Banco de México knew how to anticipate the rise in interest rates of its counterpart in the United States.

Although the president of the Fed highlighted a decrease in inflationary pressures on Wednesday in his speech, in Mexico the central bank adjusted its forecasts for the end of 2022 and for 2023 upwards, due to “deeper and more lasting” effects of the covid-19 pandemic and the war in Ukraine.

The monetary authority anticipated that there will be new adjustments to the key interest rate in accordance with the “prevailing circumstances.” If the magnitude of 75 basis points in its rate increases is maintained and the Fed’s forecast comes true, the differential could boost the local currency.

“Although inflation has also eased in Mexico, Banxico it is not yet clear whether it should moderate the restrictive stance. If the interest rate differential grows, the low volatility that the peso has shown this year could temporarily open its way to levels below 19 units”, added Jorge Calderón.

The hypothesis, albeit moderately, is reflected in the result of the central bank’s survey of sector experts, who lowered their expectation of expected levels for the exchange rate for the closings of 2022 and 2023, to averages of 20 and 20.71 compared to 20.46 and 21.02 units in October.

jose.rivera@eleconomista.mx