Mexican Peso gathers momentum as the economy shins, US Dollar heavy as US yields drop
- Mexican Peso extends its gains for the second straight day, as USD/MXN drops under 18.10 despite the sour market mood.
- Mexico’s economic activity exceeded estimates in August, providing a positive backdrop for the Peso.
- US 10-year bond yield pulls back from above 5%, weakening the US Dollar.
Mexican Peso (MXN) rallies sharply against the US Dollar (USD) during the mid-North American session, even though the conflict in the Middle East threatens to involve more players, which could trigger a risk-off impulse. That would trigger a flight to safe-haven assets, to the detriment of the Peso. The 10-year bond yield in the United States (US) surpassed the 5% threshold, though it has retreated, weighing on the US Dollar. The USD/MXN is trading at 18.08, down by 0.76% on the day.
Mexico’s economic calendar revealed that economic activity exceeded estimates in August, according to the National Statistics Agency INEGI. The economy grew above estimates in monthly and annually-based figures. The US 10-year bond yield drop from around 5.02% to 4.86% weighed on the Greenback, opening the door for further USD/MXN losses. On the US ftont, the Chicago Fed National Activity Index rose to 0.2 in September, following a plunge of -0.22 in August.
Aside from this, US troops reported attacks in Syria by drones, though no injuries were reported. Geopolitics would likely continue to set the tone in the financial markets.
Daily Digest Market Movers: Mexican Peso fights back, pushing the pair below 18.20
- The Overall Index of Economic Activity in Mexico grew by 0.4% in August, exceeding the estimated 0.3%.
- Annually based, the Mexican economic activity expanded by 3.7%, smashing forecasts of 3.4%.
- Mexico’s August Retail Sales plunged 0.4% MoM, missing estimates of no change, while annually they expanded by 3.2%. This reading was below forecasts of 4.4% and trailed July’s 5.1% growth.
- Earlier this month, data showed Mexico’s Consumer Price Index (CPI) grew by 4.45% YoY in September, slightly below the 4.47% estimated.
- The core CPI inflation in Mexico stood at a stickier 5.76% YoY, as widely estimated, but has broken below the 6.00% threshold.
- The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%).
Technical Analysis: Mexican Peso gathers momentum while USD/MXN buyers anticipate a pullback
The USD/MXN is upward biased, though the ongoing rally was capped short of testing the latest cycle high, the October 6 peak of 18.48, which gave way to a pullback to current exchange rates below the 18.15 area. The pair could aim toward 18.00 before testing the 20-day Simple Moving Average (SMA) at 17.95. A drop below that level could put the uptrend at risk, as the bulls’ latest line of defense is likely to be the 200-day SMA at 17.73.
On the other hand, if the pair aims higher and buyers reclaim 18.48, that would put the 18.50 figure into play, followed by the 19.00 mark.
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.