Mexican peso falls as refuge flows boost US dollar

• The Mexican peso falls after hitting a low of 19.18, driven by risk sentiment favoring the US dollar.
• Mexico’s economic file highlights an increase in the unemployment rate to 3.0%, focusing on upcoming inflation data and the minutes of Banxico’s September meeting.
• US non-farm payrolls for September beat expectations last Friday, adding 254,000 jobs as the unemployment rate fell to 4.1%.

The Mexican peso is starting the week on the back foot and is down about 0.50% against the greenback amid a risk-on boost that keeps the US dollar trading near seven-week highs. Last week’s outstanding US non-farm payrolls (NFP) data boosted the Mexican currency, but fears of escalating conflict in the Middle East boosted flows to safe-haven currencies. USD/MXN is trading at 19.33 after returning to daily lows of 19.18.

On Friday, the US Bureau of Labor Statistics (BLS) revealed that more than 254,000 people were added to the labor force in September, crushing estimates of 140,000 and August’s upwardly revised figure of 159,000. Consequently, the unemployment rate fell from 4.2% to 4.1%.

Following the data, USD/MXN fell to a new monthly low of 19.10, although it closed close to last Friday’s highs, opening the door for a recovery.

Money markets have discounted the odds of a 50 basis point (bps) rate cut by the US Federal Reserve (Fed) at its next meeting in November. Data from the Chicago Board of Trade (CBOT) via the fed funds rate futures contract in December show that investors expect 49 bps of easing by the Fed towards the end of 2024.

In terms of data, the Mexico file showed that the unemployment rate rose from 2.9 percent to 3.0 percent, while automobile production and exports improved.

On Thursday, Mexico’s Supreme Court voted eight to three “to consider a constitutional challenge to the controversial judicial review passed last month,” which would allow Supreme Court judges and magistrates to be chosen by electoral vote.

Ahead of the week, Mexico’s economic file will present inflation data and the minutes of the Bank of Mexico’s (Banxico) September meeting on Wednesday.

In the US, the program will include many speeches by Fed officials, consumer and producer inflation data and the University of Michigan (UoM) Consumer Sentiment for October.

Daily market reasons: Mexican peso under pressure from strong US dollar, risk aversion

• Banxico’s September survey of analysts and economists showed that inflation expectations were revised downward, with headline prices falling from 4.69% to 4.48% on the year. Core inflation is expected to reach 3.84% from 3.94%.
• The same survey showed that the USD/MXN exchange rate is forecast to end 2024 at 19.69, while Banxico’s main reference rate is forecast to end at 10%.
• Mexico’s economy is expected to grow 1.45% in 2024, down from 1.57% in August.
• Chicago Fed President Austan Goolsbee said more employment reports like this “will make me more confident that we are settling into full employment.” He said most Fed officials expect rates to fall sharply over the next 18 months.
• Citi added its name to JPMorgan and Bank of America and changed its November Fed call from a 50 bps cut to 25 bps.
• Market participants ignored a 50 bps cut. The odds of a 25 bps cut are 83.5%, while the odds of keeping rates unchanged are 16.5%, according to CME FedWatch Tool data.

USD/MXN Technical Outlook: Mexican peso falls as USD/MXN rises above 19.30

On Friday, I wrote: “The USD/MXN uptrend is in doubt as the pair cleared the 50-day simple moving average (SMA) at 19.34, with sellers taking a push.” The exotic pair remains below this zone, which could pave the way for further declines despite Monday’s solid gains.

In the short term, the Relative Strength Index (RSI) has moved higher, although it remains in bearish territory. This opens the door for an advance before resuming its downtrend.

Therefore, USD/MXN’s first resistance would be the 50-day SMA followed by the 19.50 mark. A breach of the latter will expose the October 1st daily high of 19.82 before 20.00. Next will be the YTD peak of 20.22.

On the other hand, USD/MXN’s first support would be the September 24 low of 19.23. Once broken, the next area of ​​demand will be the September 18th daily low of 19.06, ahead of the psychological figure of 19.00.