- The Mexican Peso fell sharply as USD/MXN surged above 20.00, reaching a daily high of 20.09 before retreating, following mixed US jobs data.
- Uncertainty over Fed rate cut expectations, swinging between 25 and 50 basis points, adds additional pressure on the Mexican Peso.
- Political instability in Mexico, fueled by controversial judicial reforms, leaves traders cautious and risk-averse towards the Peso.
The Mexican Peso weakened against the US Dollar on Friday, following the US Nonfarm Payrolls (NFP) report which introduced volatility in the bond market. Fed interest rate expectations swung between a 50-basis-point and a 25-basis-point cut. Combined with ongoing political uncertainty in Mexico surrounding controversial reforms, this pressure kept the Peso on the back foot. The USD/MXN traded at 20.00, marking a 0.73% gain.
The US Bureau of Labor Statistics (BLS) reported that while job creation fell short of expectations, it showed improvement compared to July. The Unemployment Rate, which had ticked up in July, fell back in August, reducing the pressure on the Federal Reserve to make aggressive rate cuts.
Following the report, the USD/MXN surged above 20.00, peaking at 20.09, before retreating as US yields dropped, which weakened the Greenback.
At the time of writing, the US Dollar Index (DXY) had recovered to 101.29, up 0.23%, after having dipped to 100.58 earlier.
In Mexico, the Citibanamex Expectations survey, a speech by Bank of Mexico Deputy Governor Jonathan Heath, and auto industry data were on the agenda. Political developments are likely to continue influencing USD/MXN movements for the rest of September.
Political instability also weighed on the Mexican Peso as traders, wary of risk, shifted to the USD/MXN. Recently, the lower house passed a controversial package of bills, including judicial reforms proposed by President Andres Manuel Lopez Obrador (AMLO), to the Senate.
If the Senate approves these judicial reforms, they will be forwarded to 32 local congresses for further approval. The changes to the Mexican Constitution will be finalized once 17 of those states approve the reforms.
Daily Digest Market Movers: Mexican Peso Shrugs Off Soft US Data, Falls Due to Risk Aversion:
- The September Citibanamex Survey forecasts a 1.5% growth for the Mexican economy in 2024, down from the previous estimate of 1.7%.
- Inflation projections indicate that the Mexican Consumer Price Index (CPI) will end 2024 at 4.60%, with a decrease to 3.8% in 2025. Core CPI is expected to finish 2024 at 3.9% and drop to 3.71% by 2025.
- The survey also predicts that Banxico will reduce interest rates to 10.25% in 2024 and further to 8.25% in 2025. The USD/MXN exchange rate is expected to end 2024 at 19.50 and 2025 at 19.85.
- According to INEGI, Mexico’s auto exports increased by 1.7% year-over-year in August, recovering from a 2.7% decline in July. Auto production also saw a notable rise of 8.3% year-over-year, compared to a 2.7% increase in July.
- US Nonfarm Payrolls rose by 142K in August, missing the anticipated 160K. July’s figures were revised down from 114K to 89K.
- The Unemployment Rate decreased from 4.3% to 4.2%, while Average Hourly Earnings grew from 3.6% to 3.8% year-over-year in August.
- Data from the Chicago Board of Trade (CBOT) suggests that the Federal Reserve is expected to implement at least a 104 basis point cut this year, up from the previous estimate of 103 bps, according to the fed funds rate futures contract for December 2024.
Technical Outlook: Mexican Peso Weakens as USD/MXN Stabilizes Around 20.00
Since the rally commenced in late May, the USD/MXN uptrend shows signs of continuing. Buyers have consistently supported dips, and the momentum is favoring upward movement, as indicated by the bullish Relative Strength Index (RSI) with an upward slope.
If USD/MXN surpasses the 20.00 level, the next resistance is at the year-to-date high of 20.22. Should the pair maintain its strength, it could challenge the daily high of September 28, 2022, at 20.57. Beyond these levels, the focus would shift to the swing high of 20.82 from August 2, 2022, with a potential push towards 21.00.
On the downside, if USD/MXN declines, initial support is at 19.50. A breach of this level could lead to a test of the August 23 low of 19.02 and potentially bring the 50-day Simple Moving Average (SMA) at 18.65 into play.
