Mexican Peso appreciates as US ISM Services PMI cools down
- Mexican Peso capitalizes on mixed economic data from the US.
- Mexico’s economic indicators show a slowdown, with housing construction down 5.2% YoY in September.
- Fed’s mixed messages on future rate cuts keep markets guessing, with further US data awaited this week.
The Mexican Peso registers decent gains versus the US Dollar after mixed US economic data augmented the chances that the Federal Reserve (Fed) could lower interest rates at the December meeting. The USD/MXN trades at 20.26, down 0.20%.
Mexico’s economic docket remained absent, yet September Gross Fixed Investment figures revealed on Tuesday hinted that the economy is slowing down. Figures showed that housing construction plunged 5.2% YoY in September, posting back-to-back months of losses, the most profound fall since March 2021.
Capex in machinery and equipment witnessed a mild advance of just 0.8%, the lowest level since the post-Covid-19 recovery in March 2021.
Across the border, the US jobs market revealed solid figures. Still, business activity witnessed a dip in the services sector, according to S&P Global and the Institute for Supply Management (ISM).
In the meantime, Fed speakers crossed the newswires. St. Louis Fed President Alberto Musalem said that time might be near to slow or pause rate cuts. Musalem added that the labor market is consistent with full employment and that inflation can converge toward 2% in the next two years.
At the same time, the Richmond Fed’s Thomas Barkin said that risks on inflation and maximum employment remain balanced.
Ahead this week, Mexico’s schedule will feature the release of automobile production data. In the US, the docket will feature Fed speakers, Initial Jobless Claims and Nonfarm Payrolls (NFP) figures.
Daily digest market movers: Mexican Peso boosted by falling US Dollar
- The latest Citi Mexico survey showed that most economists estimate Banxico will cut rates by 25 basis points at the December meeting. Analysts project the economy will grow 1.5% in 2024 and 1% in 2025.
- US ADP National Employment report for November revealed that private hiring jumped by 145K, below forecasts of 150K, and beneath the downwardly revised October figures from 238K to 184K.
- The ISM Services PMI in November retreated from 56 to 52.1, below estimates of 55.7. Earlier, S&P Global Services PMI dipped from 57 to 56.1, missing forecasts of 57.
- US Durable Goods Orders improved from 0.2% to 0.3% MoM in October, according to the US.
- The CME FedWatch Tool suggests that investors see a 79% chance of a 25-basis-point (bps) rate cut at the Fed’s December meeting.
- Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 19 bps of Fed easing by the end of 2024.
- Banxico’s November survey shows that analysts estimate inflation at 4.42% in 2024 and 3.84% in 2025. Underlying inflation figures will remain at 3.69% in 2024 and 2025. GDP is forecasted at 1.55% and 1.23% for 2024 and 2025, respectively, and the USD/MXN exchange rate at 20.22 for the rest of the year and 20.71 in 2025.
Mexican Peso technical outlook: USD/MXN drops below 20.30 on Peso’s strength
The USD/MXN uptrend remains intact, although the exotic pair fell below 20.50. Momentum shows that bears are in charge, as depicted by the Relative Strength Index (RSI) aiming toward its neutral line.
If USD/MXN drops below the November 19 low of 20.06, the next stop would be 20.00. On further weakness, the exotic pair will test the 50-day Simple Moving Average (SMA) at 19.97. A breach of the latter will expose the 100-day SMA at 19.61 before the psychological 19.00 figure.
On the other hand, if USD/MXN reclaims 20.50, the next resistance would be the year-to-date peak at 20.82. If surpassed, the next stop would be 21.00, ahead of the March 8, 2022 peak at 21.46, followed by the November 26, 2021 high at 22.15.
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.