Mexican peso extends losing streak amid risk aversion

• The Mexican peso continues to weaken, posting losses for three straight days amid rising risk aversion.
• Fed Governor Waller stands by the recent 50 bps rate cut, pointing to easing inflation and hinting at further cuts if labor conditions deteriorate.
• Banxico anticipated cutting rates by 25 bps next week, potentially holding an attractive interest rate differential to support the peso.

The Mexican peso extended its losing streak against the greenback to three straight days, with the currency set to sustain weekly losses. Risk aversion is weighing on the outlook for the peso, which failed to capitalize on the Federal Reserve’s (Fed) decision to cut rates for the first time in four years. This puts pressure on the US dollar, but USD/MXN remains firm and is trading at 19.38, posting gains of over 0.42%.

Wall Street reversed course on Friday as traders digested the decisions of three major central banks, particularly the Fed. Fed Governor Christopher Waller told CNBC that the 50 basis point cut was correct, justifying his decision based on expectations that the August personal consumption expenditure (PCE) price index will be very low.

Waller added that inflation is softening faster than he thought and he is concerned about that. He said he could do more if the labor market worsens and inflation data softens quickly.

South of the border, Mexico’s economic record is limited, with traders eyeing next week’s release of economic activity, retail sales, inflation data and the Bank of Mexico’s (Banxico) monetary policy decision.

In terms of political turmoil, the week has been quiet since the judicial reform was signed into law.

Meanwhile, traders are watching Banxico’s decision. Most analysts expect a rate cut of at least 25 basis points from 10.75% to 10.50%, which would narrow the interest gap slightly. It should, however, remain attractive to investors and boost the Mexican currency.

Daily Market Reasons: Mexican Peso Falls Ahead of Next Week’s Data

• According to various banks and rating agencies, the impact of the overhaul of the judiciary remains far from being felt. The lack of rule of law and transparency could be factors in Mexico’s long-term creditworthiness adjustment.
• On Wednesday, the Fed cut rates by 50 bps, justifying its decision on the progress of inflation, which is moving sustainably towards its 2% target. The US central bank’s focus has shifted to the labor market.
• The Fed expects inflation to condense to 2.6 percent in 2024, 2.2 percent in 2025 and 2 percent through 2026, according to its core price index for personal consumption expenditures.
• Fed officials forecast that the US economy will grow by 2% in 2024, with the unemployment rate rising to 4.4% by the end of the year.
• December 2024 federal funds rate futures suggest the Fed could cut rates by at least 53 basis points, implying that over the next two meetings, the market expects two 25 bps rate cuts to remain in 2024 .

USD/MXN Technical Outlook: Mexican peso falls as USD/MXN rises above 19.35

Technically, USD/MXN is partially bullish despite the pullback from around 20.00 to the 19.06 September 18 low. Next week, Banxico is expected to cut rates, which could push the exchange rate out of the 19.00-19.50 range.

Momentum turned bullish as the Relative Strength Index (RSI) crossed its neutral line while aiming higher.

If USD/MXN climbs above 19.50, the next resistance would be the psychological level of 20.00. Another upside appears at the annual peak at 20.22, followed by the 20.50 mark.

Conversely, if USD/MXN breaks below the September 18 low of 19.06, the psychological figure of 19.00 will be exposed. Further losses lie below, with the next line of defense for buyers being the 50-day simple moving average (SMA) at 18.99, followed by the last cycle low of 18.59, the August 19 daily low.