Mexican peso falls as Banxico downgrades growth outlook

• Mexican peso falls as Banxico cuts GDP forecast for 2024 and 2025.
• Political turmoil related to the reform of the judiciary and the dismantling of autonomous bodies is putting further pressure on the Peso.
• Banxico predicts inflation will reach its 3% target by the end of 2025, with upside risks tilted to the downside due to the slowing US economy.

The Mexican peso weakened against the greenback on Thursday, with the latter extending its gains for a second straight day on robust US data. Meanwhile, the emerging market currency fell after the Bank of Mexico (Banxico) revised down Mexico’s growth expectations for the rest of 2024, according to its quarterly report. USD/MXN trades at 19.77 and gains over 0.70%.

Political turmoil in Mexico continues to dampen the outlook for the Mexican currency. President-elect Claudia Sheinbaum has assured foreign investors that their investments are safe, even as she approves reform of the judiciary and the bill to dissolve autonomous bodies promoted by President Andres Manuel Lopez Obrador.

In addition, Banxico revised down its Gross Domestic Product (GDP) for 2024 from 2.4% to 1.5% and from 1.5% to 1.2% for 2025 after revealing its quarterly revision from Q2 2024.

In the report, policymakers noted that “national economic activity is going through a period of market weakness and uncertainty.” They revised inflation expectations higher and expect it to reach the bank’s 3% target towards the end of 2025.

In addition, they added that risks to growth are tilted to the downside, adding that an economic slowdown in the US economy is weighing on Mexico’s economic outlook.

Banxico Governor Victoria Rodriguez Ceja warned that adjustments to key benchmark rates will only be gradual when macroeconomic conditions allow.

Across the border, the US Bureau of Economic Analysis (BEA) revised up its second estimate for Gross Domestic Product (GDP). At the same time, the US Department of Labor revealed that the number of Americans filing for unemployment benefits has fallen.

Daily Market Reasons: Mexican Peso Tumbles As AMLO Cuts Ties With US-Canada Ambassadors

• Mexican President Andres Manuel Lopez Obrador’s decision to cut ties with the US and Canadian ambassadors will continue to weigh on the Mexican peso.
• US Ambassador Ken Salazar’s comments on August 22 were the reason behind AMLO’s decision. Salazar said judicial reform threatens the rule of law and added that “the direct election of judges is a major risk to the functioning of democracy in Mexico. Any judicial reform must have safeguards to ensure that the judiciary is strengthened and not subject to political corruption.”
• US GDP for Q2 2024 saw a second estimate that jumped from 1.4% in Q1 to 3%, beating estimates of 2.8%. The Personal Consumption Expenditure (PCE) deflator suggested inflation eased from 3.1% to 2.5% QoQ, slightly higher than the 2.3% forecast.
• Initial jobless claims for the week ended Aug. 24 fell from 233,000 to 231,000, below estimates of 232,000.
• Traders will watch Fed speakers and the Fed’s preferred inflation gauge, the core price index for personal consumption expenditures (PCE), which arrives on Friday.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 98 basis points (bps) under the December 2024 federal funds rate futures contract.

Technical Outlook: Mexican peso slips as USD/MXN hits two-week high at 19.95

USD/MXN is in danger of decisively breaking the 20.00 barrier. Technically, the uptrend remains intact as the Peso, despite having seen some positive days, continues to experience more significant losses.

The Relative Strength Index (RSI) suggests that buyers are in charge. RSI is still bullish, but not in overbought territory.

Therefore, the path of least resistance is up. The first USD/MXN resistance would be 20.00. A breach of this level will expose the yearly (YTD) high at 20.22, followed by the September 28, 2022, daily high at 20.57. If these two levels are taught, the next stop would be August 2, 2022, swing high at 20.82, before 21.00.

Conversely, if USD/MXN falls below 19.50, this would expose the 19.00 figure. Further losses are below this level, opening the door to test the August 19 low of 18.59, followed by the 50-day Simple Moving Average (SMA) at 18.48.