- The Mexican Peso climbs to a three-week high as the US Dollar weakens.
- Expectations for a Fed rate cut rise, with the CME FedWatch Tool indicating a 43% probability of a 50-bps cut, adding pressure on the US Dollar.
- Political concerns in Mexico subside after the approval of the judicial reform, further boosting the Peso's rally.
The Mexican Peso strengthened for the third consecutive session against the US Dollar, driven by the Dollar's overall weakness. Market sentiment improved as investors became optimistic about the Federal Reserve potentially implementing aggressive interest rate cuts, which bolstered the Mexican currency despite ongoing concerns over judicial reforms. The USD/MXN now trades at 19.25, reflecting a 1.30% decline.
Recent trading sessions have centered on the Greenback, with investors showing confidence that the Fed will lower interest rates by 0.25%, according to the CME FedWatch Tool. This optimism was briefly overshadowed by a worse-than-expected Initial Jobless Claims report, despite a rise in the Producer Price Index (PPI).
On Thursday, the CME FedWatch Tool indicated a 28% chance for a 50-basis-point rate cut. However, by the time of writing, those odds had risen to 43%, while the likelihood of a 25-bps cut had decreased to 53%.
The weakening of the Dollar is reflected in the US Dollar Index (DXY), which fell by 0.17% to 101.06.
In the US, the University of Michigan's Consumer Sentiment Index reached a four-month high in September, bolstered by improved inflation expectations.
In Mexico, political stability improved following the passage of the judicial system bill.
Gerardo Carrillo, Regional Director for LATAM at Fitch Ratings, assessed Mexico’s creditworthiness, noting, “The rating outlook is stable, indicating a balance between strengths and weaknesses. A direct downgrade of the sovereign rating is unlikely; instead, we might see a change in the outlook, potentially moving from stable to positive or negative, with the latter being more probable.”
Additionally, Bank of Mexico (Banxico) Director of Economic Research, Alejandrina Salcedo, emphasized that a strong rule of law is crucial for fostering investment. She stated that adherence to the rule of law and public safety would enhance certainty, attract investment across regions, and leverage opportunities arising from the relocation process.
Daily Digest: Market Movers – Mexican Peso Strengthened by US Dollar Weakness
- The USD/MXN exchange rate will likely continue to be influenced by market sentiment and expectations for a more substantial Federal Reserve rate cut.
- Next week, Mexico's economic calendar will include reports on Aggregate Demand and Private Spending for Q2 2024.
- Mexico's inflation fell below 5% in August, which could increase the likelihood of further easing by Banxico.
- The September Citibanamex Survey predicts that Banxico will reduce rates to 10.25% in 2024 and 8.25% in 2025. The forecast for the USD/MXN rate is 19.50 by the end of 2024 and 19.85 by the end of 2025.
- The University of Michigan Consumer Sentiment Index rose to 69.0 from 67.9, surpassing expectations of 68. Inflation expectations for the next year improved slightly from 2.8% to 2.7%, while longer-term expectations increased from 3% to 3.1%.
- The US Dollar remained under pressure after the US Bureau of Labor Statistics reported mixed August PPI figures and a rise in unemployment benefit claims, aligning with estimates and surpassing the previous week's numbers.
- Data from the Chicago Board of Trade indicates that the Fed is expected to cut at least 98 basis points this year, down from the previous forecast of 108 basis points, according to December 2024 fed funds rate futures contracts.
USD/MXN Technical Outlook: Mexican Peso Gains as USD/MXN Falls Below 19.30
The USD/MXN pair has experienced a sharp decline, dropping over 7,000 pips below the psychological 20.00 level. Key support levels are now coming into play, and the momentum has shifted in favor of sellers, with the Relative Strength Index (RSI) signaling a bearish trend.
In the short term, the USD/MXN is likely to move downward. Immediate support is at the August 23 low of 19.02. A break below this level would bring the 50-day Simple Moving Average at 18.99 into focus, followed by the August 19 cycle low at 18.59.
On the other hand, for a bullish outlook, the USD/MXN needs to surpass the psychological 20.00 level. If it does, the next resistance would be the year-to-date high of 20.22. Beyond this, the pair could test the daily high of September 28, 2022, at 20.57. If these levels are breached, the next target would be the swing high of August 2, 2022, at 20.82, with 21.00 as a further resistance level.
