Mexican Peso weakens further as tensions grow in Senate
- Mexican Peso dips over 1%; USD/MXN rises from 19.86 as Senate nears judicial reform vote.
- Foreign institutions and ratings agencies suggest economic risks and potential downgrade if reform is approved.
- Weaker-than-forecast inflation raises likelihood of Banxico rate cut on September 26; US Fed anticipated to cut rates by 25 bps soon.
The Mexican Peso depreciated over 1% against the American Dollar on Tuesday amid increasing tensions surrounding the Senate’s approval of judicial reform. At the time of writing, the USD/MXN trades at 20.09 after bouncing off a daily low of 19.86.
The Mexican currency will remain volatile throughout the week as the Senate discusses the judicial reform. On Monday, a news article in El Sol de Mexico said Miguel Angel Yunez Marquez, Senator of the opposition party Partido Accion Nacional (PAN), would be the vote needed to approve the reform.
The Senate will begin formally reading the judicial bill at around 19:00 GMT. It’s expected that it will be voted on Wednesday or Thursday.
Foreign institutions had expressed that the reform could deteriorate the state of law and the country’s credibility. Julius Baer warned that ratings agencies could change Mexico’s creditworthiness. They added their name to Morgan Stanley, Bank of America, JP Morgan, Citibanamex and Fitch by warning of the economic and financial impact regarding the approval of judicial reform.
Data-wise, the latest Consumer Price Index (CPI) reported on Monday showed that Mexican inflation was softer than expected, increasing the chances that the Bank of Mexico (Banxico) will cut interest rates at the September 26 meeting.
Kimberley Sperrfechter, an analyst at Capital Economics, commented that the latest inflation report and the likelihood of a Fed rate cut next week “mean that Banxico is on track to lower its policy rate by another 25 [basis points] at its meeting this month.”
Across the border, a Reuters poll revealed that 92 of 101 economists expect the Federal Reserve (Fed) to lower interest rates by 25 basis points (bps) at the September 17-18 meeting. The US economic docket has been scarce through the first couple of days, yet traders are eyeing the release of the latest inflation report. The data is expected to reassure investors that the Fed will cut rates at the upcoming meeting.
Daily digest market movers: Mexican Peso weakens on judicial reform expected vote
- Mexico’s inflation in August dipped below 5% on headline figures on an annual basis, while core inflation stood firm near 4% YoY.
- Mexico’s economic docket will gain traction on Wednesday, September 11, with the release of Industrial Production data. Later, the Senate is expected to approve the judiciary reform.
- September’s Citibanamex Survey showed that Banxico is expected to lower rates to 10.25% in 2024 and to 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
- US CPI is expected to dip from 2.9% to 2.6% YoY in August, while core CPI is projected to remain at 3.2%.
- Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 108 basis points this year, up from 104.5 a day ago, according to the fed funds rate futures contract for December 2024.
USD/MXN technical outlook: Mexican Peso tumbles as USD/MXN rises above 20.00
The USD/MXN uptrend has extended above the 20.00 figure, with the exotic pair meandering around the figure after reaching a daily high of 20.13. Momentum hints that buyers are stepping in, as depicted by the Relative Strength Index (RSI) aiming upward and cracking the latest peak.
If the USD/MXN holds to gains above 20.00, the next ceiling level would be the YTD high at 20.22. On further strength, the pair could challenge the daily high of September 28, 2022, at 20.57. If those two levels are surrendered, the next stop would be the swing high at 20.82 on August 2, 2022, ahead of 21.00.
Conversely, if USD/MXN weakens further, the first support would be 19.50. A breach of the latter will expose the August 23 swing low of 19.02 before giving way to sellers eyeing a test of the 50-day Simple Moving Average (SMA) at 18.65.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.