Mexican peso rallies as investors shrug off judicial reform

• Mexican Senate Passes Controversial Judicial Reform But Peso Recovers As Investors Focus On Potential Fed Easing Cycle.
• USD/MXN is down 1.63% as investors are pricing in an 85% chance of a 25bp rate cut at the September Fed meeting.
• US inflation data raises doubts about a 50bps rate cut, while the US economic file featuring PPI and consumer sentiment may weigh on USD/MXN.

The Mexican peso staged a rally against the U.S. dollar on Wednesday as investors shrugged off Mexico’s Senate passage of a controversial reform that threatens the rule of law. Expectations that the Federal Reserve (Fed) will begin its easing cycle next week keep the peso on top. USD/MXN is trading at 19.75, down 1.63%.

Mexico’s economic file showed industrial production in July was lower than expected based on monthly figures, while expanding on an annual basis. Political tensions rose after the Mexican Senate voted to approve reform of the judicial system by 86 votes to 41.

Now that the bill has been approved, it will be sent to 32 state congresses. For the reform to become law in the Mexican Constitution, it would need the approval of 17 congresses.

Across the border, data from the US Bureau of Labor Statistics dampened traders’ hopes for a 50 basis point (bps) Fed rate cut. Inflation in the US remains within reach of the US central bank’s target, however, the core MoM figures rose.

This strengthened the greenback, although the rally was short-lived. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of peers, is basically unchanged at 101.70, up 0.05% after the CPI release.

Meanwhile, sources cited by Bloomberg said that if the Fed does not cut by 50 bps in September, it will do so in November, according to Evercore’s Krishna Guha.

Money market futures traders cut the odds of a 50 bps cut to 15 percent, while the odds of 25 bps rose to 85 percent, according to CME FedWatch Tool data.

The Mexican file will be empty for the rest of the week. In the US, the schedule will include jobs data, producer price index (PPI) and US consumer sentiment data, which could move the needle in the USD/MXN pair.

Daily Market Reasons: Mexican Peso Strengthens After Senate Passes Judicial Reform

• Mexico’s industrial production fell in July from 0.4% to 0.2% monthly. On an annual basis, manufacturing rose 2.1%, crushing forecasts for a 1.1% jump and improving from a -0.7% contraction.
• Inflation in Mexico in August fell below 5% from the headline figures on an annual basis, while core inflation remained firm near 4% on the year.
• Citibanamex’s September survey showed that Banxico will cut rates to 10.25% in 2024 and 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
• CPI data from the US Bureau of Labor Statistics showed that headline inflation in August eased from 2.9% to 2.6% on the year, as expected.
• However, the US core CPI, which excludes volatile items and is sought as a realistic gauge of inflation, stagnated at 3.2% on the year. In monthly figures, the core CPI rose from 0.2% to 0.3%, while the headline CPI was 0.2% on the month.
• Data from the Chicago Board of Trade suggests the Fed will cut by at least 98 basis points this year, down from 108 a day earlier, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican peso rises as USD/MXN slips below 19.80

USD/MXN’s uptrend is intact, although the pair is lower following the approval of judicial reform. The pair hit a new weekly low of 19.74, although some buyers entered the market after the latter’s decline.

The Relative Strength Index (RSI) is mixed as the indicator is bullish, but the slope suggests that sellers are gaining momentum as the RSI is targeting the neutral 50 line. Therefore, in the short term, the exotic pair is tilted to the downside.

If USD/MXN stays below 20.00, the first support will be 19.50. A breach of the latter will expose the August 23 swing low of 19.02 before giving way to sellers eyeing a test of the 50-day simple moving average (SMA) at 18.85.

Instead, USD/MXN needs to clear the psychological 20.00 figure for a bullish continuation. If broken, the next cap 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.