Mexican Peso rallies on growing Fed rate cut speculation

July 3, 2024 7:49 pm

  • Mexican Peso is buoyed, sponsored by weak US data and cautious comments from Chair Powell.
  • Banxico Deputy Governor Heath mirrors Powell’s caution, advocating for clearer signs of benign inflation before rate cuts.
  • Disappointing US private hiring, rising unemployment claims, sharp drop in ISM Services PMI pressure Greenback.

The Mexican Peso skyrocketed against the US Dollar on Wednesday after data from the United States (US) fueled speculation that the Federal Reserve (Fed) might cut interest rates more aggressively than expected. That and Fed Chair Jerome Powell’s remarks at the European Central Bank’s (ECB) Sintra Forum spooked investors, who ditched the Greenback. The USD/MXN trades at 18.11, down 0.76%.

Mexico’s economic docket was light as the Bank of Mexico (Banxico) revealed that the Foreign Exchange Reserve increased in May from April 2024. Additionally, Banxico Deputy Governor Jonathan Heath noted on X that he “agree[s] with Jerome Powell, more benign inflation data is needed before cutting rates. He said it for the Federal Reserve, but the same applies to the case of Mexico”.

US economic data disappointed market players after private hiring was lower than May’s but missed the mark. That, along with more Americans filing for unemployment benefits and the ISM Services PMI plunging after hitting its highest level since August 2023, weighed on the US Dollar as US yields dropped.

US Treasury yields fell as market participants began to price in additional rate cuts. According to the CME FedWatch Tool, odds for a September 2024 cut lie at 66%, higher than a day ago’s 63% chances.

Daily digest market movers: Mexican Peso rises further on US Dollar weakness

  • Foreign Exchange Reserve in Mexico rose by $223 billion, exceeding April’s $221 billion and reaching an all-time high.
  • Banxico’s survey showed that economists estimate the Gross Domestic Product (GDP) to end at 2%, down from 2.1%. They expect Banxico to cut rates from 11.00% to 10.25%, up from 10.00% projected in May.
  • On Monday, Banxico Governor Victoria Rodriguez Ceja was dovish, as she said the evolution of disinflation can “allow us to continue discussing downward adjustments in our rate, and I consider that this is what we will be doing in our next monetary policy meetings.”
  • Fed Chair Powell said the US economy made significant progress on inflation while adding that the risks of the Fed’s dual mandate are more balanced.
  • US jobs data was released earlier, led by the ADP Employment Change, in June, which was 150K, below estimates of 160K and trailing May’s 157K.
  • After that, US Initial Jobless Claims for the week ending June 29 were 238K, exceeding estimates of 235K and the prior reading of 234K.
  • June’s ISM Services PMI plummeted to recessionary territory, from 53.8 to 48.8, the fastest pace in four years and its weakest since May 2020.

Technical analysis: Mexican Peso extends advancement as USD/MXN slumps below 18.20

The USD/MXN extended its losses to two straight days, with the pair clearing key support seen at 18.20, exposing the psychological 18.00 figure. Although momentum remains bullish, as depicted by the Relative Strength Index (RSI), buyers had lost traction while sellers continued to gain steam.

If USD/MXN drops further, the next target is the psychological level of 18.00. Breaking below this level would expose the next support at the December 5 high, which turned support at 17.56. Further decline aims for the 50-day Simple Moving Average (SMA) at 17.37.

Conversely, if buyers push the spot price above 18.50, it could rally toward the June 28 high of 18.59, potentially extending gains to challenge the year-to-date high of 18.99.

Mexican Peso FAQs

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

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