Mexican peso falls amid weak retail sales ahead of GDP data

• The Mexican peso weakens after INEGI reported sharp declines in June retail sales amid inflation concerns.
• US dollar strengthens following downward revision of Non-Farm Payrolls by 800,000.
• Fitch warns of rising debt risks for Mexico’s next administration, with potential impact on the sovereign rating amid controversy over judicial reform.

The Mexican peso depreciated more than 1.20 percent against the U.S. dollar in early trade on Wednesday as traders digested Mexico’s dismal retail sales report and awaited the release of a revision to U.S. employment figures. USD/MXN is trading at 19.21 after recovering from a daily low of 18.92.

Wall Street traded in the green, showing optimism among investors. The greenback advanced as the Bureau of Labor Statistics (BLS) revised down the non-farm payrolls (NFP) numbers by 800,000.

Meanwhile, on Tuesday, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed that retail sales in June fell in monthly and annual figures. In addition to these data, mid-August inflation data is expected to rise in core numbers, while the headline is set to decline.

Meanwhile, Fitch Ratings said that Mexico’s next administration will face a rising debt of more than 51 percent of Gross Domestic Product (GDP), which could affect the country’s sovereign rating.

The agency noted: “The Sheinbaum government’s fiscal strategy and governance reforms will be key factors for Mexico’s rating.”

Fitch analysts added that judicial reform “would negatively affect Mexico’s overall institutional profile, but the severity of their impact may become clearer once it is approved and implemented.”

Meanwhile, unions representing Mexico’s justice workers launched an indefinite nationwide strike last Monday against President Andres Manuel Lopez Obrador’s proposed judicial reform.

According to Reuters, “unions criticized the reform push in a statement as being rushed and a danger to the ruling Morena party’s ‘only counterweight’ to the dominance of both the presidency and Congress.”

Juana Fuentes, the national director of Mexico’s Association of Federal Judges and Magistrates, which organized the strike vote on Tuesday, said: “If this bill is approved, we will create a regime of absolute power concentrated in one person.”

Additionally, USD/MXN traders will be watching for the release of the latest Federal Reserve (Fed) monetary policy meeting.

Daily market reasons: Mexican peso weakens as data suggests economic slowdown

• Retail sales in Mexico for June fell -3.9% from a year earlier, below expectations for a -1.7% contraction. On a monthly basis, sales fell by -0.5%, below estimates of a 0.2% increase.
• Mid-August inflation is expected to ease from 5.61% to 5.31%, while core numbers are expected to rise from 4.02% to 4.06%.
• Meanwhile, Mexico’s economy is expected to grow 2.2 percent from last year, according to final Gross Domestic Product (GDP) figures for the second quarter, which is against preliminary readings of 1.65 percent.
• USD/MXN is also driven by interest rate differentials between the two countries. Although the spread narrowed as the Bank of Mexico (Banxico) cut rates at its August meeting, traders expect the Fed to cut rates by at least 98 basis points, according to the December 2024 CBOT futures contract.

Technical Analysis: Mexican peso extends losses as USD/MXN climbs above 19.20

The USD/MXN uptrend remains intact and could continue, but resistance to shakeout is expected. Momentum favors buyers, with the Relative Strength Index (RSI) remaining bullish.

If the exotic pair extends its gains, the first resistance it would face would be 19.50. A breach of the latter will expose the psychological figure of 20.00, ahead of the yearly (YTD) high of 20.22.

On the other hand, in USD/MXN, there is further weakness. Buyers of the Peso could drive the pair below the psychological figure of 19.00. Once released, the next stop will be the last cycle low of 18.59, reached on August 19.