Mexican peso falls on political uncertainty despite weak US NFP data

VaselineSeptember 6, 2024

0 5 minutes read

Mexican peso falls on political uncertainty despite weak US NFP data

Mexican peso falls as USD/MXN climbs above 20.00 on mixed US jobs data, hitting a daily high of 20.09 before retreating.
Expectations for a Fed rate cut remain uncertain, fluctuating between 50 and 25 bps, adding pressure to the Mexican peso.
Political instability in Mexico, driven by controversial judicial reforms, keeps traders risk-averse.

The Mexican peso depreciated against the US currency on Friday after the US non-farm payrolls (NFP) report spurred volatility in the bond market. Probabilities for the Fed rate have fluctuated between a 50 or 25 basis point cut. This and Mexico’s political uncertainty surrounding the controversial reforms are keeping the peso under pressure. USD/MXN is trading at 20.00, gaining 0.73%.

The U.S. Bureau of Labor Statistics (BLS) revealed that the U.S. economy added fewer jobs than expected, but improved compared to July’s numbers. The same report showed that the unemployment rate, which rose by two-tenths in July, fell in August, relieving the Federal Reserve (Fed) of cutting borrowing costs in an “aggressive” way.

After the data, USD/MXN rose above 20.00 and hit a daily high of 20.09, but retreated as US yields retreated and undermined the greenback.

At the time of writing, the US Dollar Index ( DXY ), which tracks the greenback’s performance against six other currencies, recovered and rose 0.23% to 101.29 after hitting a low of 100.58 .

Meanwhile, in Mexico, the file featured the release of the Citibanamex Expectations survey, a speech by Bank of Mexico Deputy Governor Jonathan Heath and auto industry data. Politics will likely continue to drive USD/MXN price action for the rest of September.

In addition, political uncertainty weighed on the Mexican peso as traders averted risk on the carry involving that currency and bought USD/MXN. Two days ago, the lower house sent a controversial package of bills to the Senate, including changes to the judiciary pushed by President Andres Manuel Lopez Obrador (AMLO).

If the Senate approves the judicial reform, then “it will be passed for approval in 32 local congresses. Once the bill is approved in 17 of these states, the changes to the Mexican Constitution will be made official,” writes FXStreet.

Daily market reasons: Mexican peso shrugs off weak US data, falls on risk aversion

The September Citibanamex survey showed private economists had forecast the Mexican economy to grow 1.5 percent in $202, down from 1.7 percent.
In terms of inflation, the survey revealed that the Mexican Consumer Price Index (CPI) in 2024 would end at 4.60%, and next year it will reach 3.8%. Core CPI is forecast to end 2024 at 3.9%, and by 2025 it is expected to decline to 3.71%.
The survey added that Banxico is expected to cut rates to 10.25% in 2024 and to 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
INEGI revealed that Mexico’s auto exports rose 1.7% year-on-year in August, after falling 2.7% year-on-year in July. Meanwhile, auto production rose 8.3 percent from July’s 2.7 percent.
US nonfarm payrolls rose by 142,000 in August but missed the 160,000 mark. It should be said that the July numbers were revised down from 114K to 89K.
The unemployment rate fell from 4.3% to 4.2%, while average hourly earnings rose from 3.6% to 3.8% on the year in August.
Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut at least 104 basis points this year, up from 103 bps a day ago, according to the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso softens as USD/MXN hovers around 20.00

Price action since the start of the late May rally suggests that the USD/MXN uptrend will continue. Twice, buyers bought the dip and the momentum is in their favor as shown by the relative strength index (RSI).

The RSI is bullish with an upward slope. Therefore, the path of least resistance is up.

If USD/MXN breaks above 20.00, the next ceiling level would be the YTD high at 20.22. Next, the pair could challenge the daily high of September 28, 2022 at 20.57. If these two levels are surrendered, the next stop would be the swing high at 20.82 on August 2, 2022, before 21:00.

Conversely, if USD/MXN weakens further, the first support would be 19.50. A breach of the latter will expose the August 23 low of 19.02 before giving way to sellers eyeing a test of the 50-day simple moving average (SMA) at 18.65.

Frequently asked questions about the Mexican peso

The Mexican peso (MXN) is the most traded currency among its Latin American peers. Its value is largely determined by the performance of the Mexican economy, the policy of the country’s central bank, the volume of foreign investment in the country, and even the level of remittances sent by Mexicans living abroad, especially in the United States. Geopolitical trends can also move the MXN: for example, nearshoring – or the decision by some firms to relocate production capacity and supply chains closer to their home countries – is also seen as a catalyst for the currency Mexican, as the country is considered a key manufacturing hub on the American continent. Another catalyst for the 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 keep inflation at low and stable levels (at or near its 3% target, the midpoint in a tolerance band of 2% to 4% ). For this purpose, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will try to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus reducing 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. Conversely, lower interest rates tend to weaken the MXN.

Macroeconomic data is essential to assess the state of the economy and can impact the valuation of the Mexican peso (MXN). A strong Mexican economy based on high economic growth, low unemployment and high confidence is good for the MXN. Not only does it attract more foreign investment, it can encourage the Bank of Mexico (Banxico) to raise interest rates, especially if this force is associated with increased inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging market currency, the Mexican peso (MXN) tends to struggle during periods of risk, or when investors perceive broader market risks to be low and are therefore willing to commit to investments that carry more risk. great. Conversely, MXN tends to weaken during periods of market turbulence or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.

VaselineSeptember 6, 2024

0 5 minutes read

Daily market reasons: Mexican peso shrugs off weak US data, falls on risk aversion

Technical outlook: Mexican peso softens as USD/MXN hovers around 20.00

Frequently asked questions about the Mexican peso

Vaseline

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