Mexican Peso surges as reform panic fades
- Mexican Senate passes controversial judicial reform, but Peso recovers as investors focus on potential Fed easing cycle.
- USD/MXN drops 1.63% with investors pricing in an 85% chance of a 25 bps rate cut at the Fed’s September meeting.
- US inflation data raises doubts over a 50 bps rate cut, while the US economic docket featuring PPI and consumer sentiment may influence USD/MXN.
The Mexican Peso staged a recovery against the US Dollar on Wednesday as investors shrugged off Mexico’s Senate passing of a controversial reform that threatens the state of law. Expectations that the Federal Reserve (Fed) will begin its easing cycle next week keep the Peso on the front foot. The USD/MXN trades at 19.79, down by 1.41%.
Mexico’s economic docket revealed that Industrial Production in July was lower than expected based on monthly figures, while it expanded on an annual basis. Political tensions heightened after the Mexican Senate voted to approve the judiciary reform with 86 votes in favor and 41 against.
Now that the bill has been approved, it will be sent to 32 state congresses. For the reform to become law in the Mexican Constitution, it would need the approval of 17 congresses.
Across the border, data from the US Bureau of Labor Statistics dampened traders’ hopes for the Fed’s 50-basis-point (bps) rate cut. Inflation in the US remains within reach of the US central bank target, yet core figures on MoM figures rose.
This bolstered the Greenback, though the uptick was short-lived. The US Dollar Index (DXY), which tracks the performance of the buck’s value against a basket of peers, is virtually unchanged at 101.70, up 0.05% following the CPI release.
Meanwhile, sources cited by Bloomberg said that if the Fed doesn’t cut 50 bps in September, it will do so in November, according to Krishna Guha of Evercore.
Money market futures traders slashed the odds for a 50 bps cut to 15%, while chances for 25 bps jumped to 85%, via the CME FedWatch Tool data.
The Mexican docket will be empty for the rest of the week. In the US, the schedule will feature jobs data, the Producer Price Index (PPI), and consumer sentiment data in the US, which could move the needle in the USD/MXN pair.
Daily digest market movers: Mexican Peso strengthens after judicial reform approval in Senate
- Mexico’s Industrial Production in July dipped from 0.4% to 0.2% MoM. On an annual basis, production increased by 2.1%, crushing projections for a 1.1% jump and improving from a -0.7% contraction.
- Mexico’s inflation in August dipped below 5% on headline figures on an annual basis, while core inflation stood firm near 4% YoY.
- 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.
- The US Bureau of Labor Statistics’ CPI data revealed that August’s headline inflation dipped from 2.9% to 2.6% YoY as expected.
- Still, US core CPI, which excludes volatile items and is sought as a realistic inflation gauge, stalled at 3.2% YoY. In monthly figures, core CPI increased from 0.2% to 0.3%, while headline CPI stood at 0.2% MoM.
- Data from the Chicago Board of Trade suggests the Fed will cut at least 98 basis points this year, up from 108 a day ago, according to the fed funds rate futures contract for December 2024.
USD/MXN technical outlook: Mexican Peso soars as USD/MXN tumbles below 19.80
The USD/MXN uptrend is intact, although the pair edges lower following the approval of the judicial reform. The pair hit a new weekly low of 19.74, though some buyers entered the market after the dip to the latter.
The Relative Strength Index (RSI) is mixed as the indicator is bullish, but the slope suggests that sellers are gathering steam as the RSI aims for the 50-neutral line. Hence, in the short term, the exotic pair is tilted to the downside.
If USD/MXN stays below 20.00, the first support will 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 18.85.
Conversely, the USD/MXN must clear the psychological 20.00 figure for a bullish continuation. If surpassed, 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.
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.