Mexican peso gains as major currency peers suffer on lower interest rate outlook

• The Mexican peso rises in key pairs as expectations of lower interest rates in the US and Europe weigh on peers.
• The USD is being hit by a revival of the debate over a 50 or 25 basis point cut, and the Euro by lower economic growth forecasts.
• USD/MXN hits downside target after a key breakout from a rising channel.

The Mexican peso (MXN) extended its gains on Friday, capping a week in which the currency appreciated an average of 2.3% against its strongest-traded peers so far.

Expectations that interest rates will fall faster in Europe and the US as growth slows and labor markets weaken are weighing on the peso’s key peers – the US dollar (USD), euro (EUR) and British pound (GBP). Meanwhile, Mexico’s still high interest rates at 10.75% continue to attract foreign capital inflows, supporting the MXN.

Mexican peso rises against USD after WSJ article, Dudley’s speech

The Mexican peso is rising against the USD amid a resurgence of the possibility that the Federal Reserve (Fed) will cut interest rates further by 0.50% (50 basis points) at its September meeting next week. Such a reduction would be negative for the US dollar (USD) as lower interest rates attract less capital inflows.

Speculation of a bigger cut than 0.50% was revived by a respected reporter for The Wall Street Journal (WSJ), Nick Timiraos, who wrote an article in support of the case. This was followed by a story in the Financial Times (FT) to the same effect.

During the Asian session on Friday, William Dudley, former president of the Federal Reserve Bank (Fed) in New York, said “there is a strong case” for the Fed to cut interest rates by half a percentage point at the September FOMC meeting, in a speech. in Singapore, according to Reuters.

Dudley’s articles and comments appear to have caused a sharp decline in two-year U.S. Treasury yields, which fell five basis points during Friday’s Asisan session. The USD also weakened as traders weighed the possibility of lower interest rates amid a less inflationary outlook.

“US yields edged lower in Asian trade on Friday, while futures rose in reaction to media reports that next week’s decision to cut by 25 bps or 50 bps was a close call,” according to Reuters .

ECB cuts rates and signals slowing economic growth

Against the euro, the peso is rising after the European Central Bank (ECB) decided to cut interest rates at its September meeting on Thursday.

The ECB cut its deposit rate by 0.25%, but cut its main overnight refinancing rate and marginal lending facility by 0.60%. Although the cuts have been widely telegraphed, the accompanying statement showed a downward revision to the ECB’s growth forecasts for the region, which some analysts see as a red alert for further cuts. This, in turn, weakened the euro.

ECB President Christine Lagarde declined to speculate on whether the ECB will cut interest rates again in October during her press conference. However, according to Bloomberg News, if the Fed goes ahead with a bigger cut of 0.50% next Wednesday, it would encourage the ECB to cut another 0.25% in October.

Meanwhile, sterling is trading on the back foot after UK data showed Gross Domestic Product (GDP) growth stagnated in July, when economists had forecast a 0.2% rise. This, combined with declines in both industrial production and manufacturing, suggests a greater likelihood that the Bank of England (BoE) will decide to cut interest rates when it meets next Thursday, weighing on the GBP.

Peso holds the field

The Mexican peso remains relatively strong despite the passage of controversial judicial reforms in the country’s Senate on Wednesday. Although the reforms have been widely criticized by investors – including rating agencies like Moody’s – as undermining the independence of the judiciary and could lead to a drop in foreign investment, the Peso appears to have already assessed the risk.

Former President Donald Trump’s lower likelihood of winning the November presidential election after his lackluster performance in a debate with Vice President Kamala Harris on Tuesday has eased some of the political risk that would be associated with the “America First” orientation expected from a Trump. presidency.

Despite investor concerns about the policies of the current leftist government, Mexico continues to benefit from a nearshoring boom as global manufacturing companies move to Mexico to produce goods for the US and Latin American markets.

This was highlighted by Volvo’s announcement in August, when the automaker said it planned to build a $700 million heavy-duty truck manufacturing plant in the northern Mexican city of Monterrey.

At the time of writing, the US dollar (USD) buys 19.50 Mexican pesos, EUR/MXN trades at 21.60 and GBP/MXN at 25.64.

Technical Analysis: USD/MXN Hits Downside Target for Channel Break

USD/MXN recently broke out of a channel and has now fallen to the breakout target at 19.62, calculated by taking the 0.618 Fibonacci ratio (Fib) of the channel height and extrapolating it lower.

USD/MXN 4 Hour Chart

It has also now hit the next target at 19.50, the 1,000 ratio Fib extension, which also coincides with the key support level from the August 22 high.

The pair is now oversold, according to the relative strength index (RSI), advising traders not to add to short positions as the risk of a pullback has increased. If the RSI is oversold, it will signal that a correction is underway and prices will recover. However, given the short-term bearishness, such a correction could be relatively short-lived before prices resume their downtrend.

A close below the 19.46 low of 12 September would confirm an extension of the downtrend to the next target at 19.01 (low of 23 August).

The trend of the medium and long-term charts remains bullish, however, suggesting the risk of a rally and the resumption of the broader trend higher.

A break above 19.84 would be the first sign of such a bullish resumption, although a break above the year-to-date high of 20.15 would provide more concrete confirmation of a continuation of the bull trend, with the next target at the upper channel line. in the 20s, 60s.