Mexican peso slips on geopolitical risks and US dollar strength

• Mexican peso posts two days of gains and falls on Israel/Iran hostilities.
• Banxico’s September survey revised upward expectations for the USD/MXN exchange rate, while forecasts for inflation were cut.
• Traders await September’s nonfarm payrolls data, with strong results likely to boost the greenback and further weigh on the peso.

The Mexican peso slipped in early trade against the greenback on Thursday amid rising geopolitical risks as President Joe Biden discussed with Israel how to attack Iranian oil facilities. Data from Mexico showed an increase in foreign reserves, according to the Bank of Mexico (Banxico). USD/MXN is trading at 19.53, gaining over 0.60%.

Market sentiment deteriorated slightly due to the conflict in the Middle East. Clashes between Israel and Hezbollah continue in southern Lebanon on Thursday. Meanwhile, Israel has struck central Beirut and is expected to launch a separate attack on Iranian assets in the near future.

This affected the risk-sensitive Mexican peso due to its status as an emerging market currency. The U.S. dollar index ( DXY ), which tracks the greenback’s performance against a basket of six currencies, rose 0.43 percent on safe-haven flows, regaining the 102.00 mark for the first time since Aug. 20.

Meanwhile, Banxico’s September survey of 40 private groups of analysts and economists revealed that the USD/MXN exchange rate has been revised upward and will finish higher compared to the August survey. The same survey showed that expectations for headline and core inflation were subdued, while the main benchmark rate set by Mexico’s central bank is expected to end at around 10 percent.

President Claudia Sheinbaum has proposed a 12 percent wage increase in 2025, according to newswires.

In the US, the Labor Department revealed that the number of Americans filing for unemployment benefits rose, beating forecasts and the previous reading. S&P Global and the Institute for Supply Management (ISM) showed services PMI readings were mixed. The former missed estimates, while the latter crushed estimates, expanding to its highest level since February 2023.

On Friday, USD/MXN traders will be eyeing the release of September non-farm payrolls figures. If the data beats estimates, this would be positive for the Greenback and could sponsor an advance in the pair. Conversely, if the data comes in as expected and risk appetite has improved, it would be positive for the Mexican peso.

Daily Market Reasons: Mexican Peso Falls on Risk Aversion Over Middle East Conflict

• Mexico’s foreign reserves rose in August from $227 billion to $231 billion.
• The Banxico survey showed that economists expect the USD/MXN exchange rate to end at 19.69 in 2024. Inflation expectations were revised down from 4.69% to 4.48%, and the core is expected to decrease to 3.84% from 3.94%.
• Mexico’s economy is expected to grow 1.45% in 2024, down from 1.57% in August. Economists expect Banxico to cut rates to 10 percent, down from 10.25 percent in the previous survey.
• On Tuesday, Banxico Deputy Governor Jonathan Heath said interest rates should remain higher for “longer,” while acknowledging that core inflation is approaching target. He added that the US central bank’s rate cut will not have a direct impact on Banxico policy and he does not believe Mexico is close to recession.
• Mexican data shows the economy could slow sharply. Business confidence continued to deteriorate, while business activity, as measured by the S&P Global Manufacturing PMI, contracted sharply.
• Initial US jobless claims for the week ended September 28 rose to 225,000 from 219,000, beating estimates of 220,000.
• ISM Services PMI in September expanded from 51.5 to 54.9; Factory orders for August eased, missing estimates of 0% to reach -0.2%, down from 4.9% previously.
• Market participants pegged a 25bps cut at 66.7%. According to the CME FedWatch tool, the odds of a rate cut of more than 50 bps fell to 33.3%.

Technical Analysis: Mexican peso falls as USD/MXN climbs above 19.40

USD/MXN’s uptrend remains intact, but buyers have lost momentum as indicated by the Relative Strength Index (RSI). The RSI has slipped below its neutral line, an indication that sellers have the upper hand. Therefore, the path of least resistance is skewed to the downside.

If USD/MXN clears the 50-day simple moving average (SMA) at 19.32, the next support would be the September 24 low of 19.23 before the pair heads to the September 18 daily low of 19.06. Once these levels are exceeded, the 19.00 figure appears as the next line of defense.

Conversely, for a bullish resumption, USD/MXN needs to break above the daily high of 19.82 from October 1st. Going forward, the next resistance will be the psychological figure of 20.00, followed by the YTD high of 20.22.