Mexican peso falls amid strong US dollar on high US yields

• The Mexican peso falls, weighed by risk-off sentiment and strong US economic data.
• Banxico Vice Governor Omar Mejia hinted at a negative output gap until the end of 2024, which could influence future inflation.
• Traders await Mexico’s September inflation data and Banxico meeting minutes, with expectations for further rate cuts by the end of the year.

The Mexican peso depreciates against the US dollar as high US Treasury yields support the greenback on Tuesday. This and news that China’s stimulus program fell short of market expectations weighed on the emerging market currency. USD/MXN is trading at 19.35, up over 0.50%.

During the Asian session, news revealed that Zheng Shanjie, head of China’s National Development and Reform Commission (NDRC), failed to provide details on the form and size of the government’s fiscal stimulus. This caused a sell-off in Chinese stocks and changed sentiment.

This has undermined the Mexican peso amid a limited economic record. Traders are eyeing the release of inflation figures on Wednesday and the final minutes of the Bank of Mexico’s (Banxico) policy meeting on Thursday.

On Monday, Banxico Vice Governor Omar Mejia said estimates suggested the economy could post a negative output gap by the end of 2024. Mejia added that it could influence prices when output falls below its full potential.

A Reuters poll showed analysts expected September’s Consumer Price Index (CPI) in Mexico to fall to 4.62 percent, the lowest level since March. Meanwhile, core CPI for the same period is forecast to fall to 3.96%, extending its trend for the 20th consecutive month.

Last week, Banxico Governor Victoria Rodriguez said future cuts could be higher as long as the inflation rate continues to fall.

In its last meeting, Banxico cut interest rates to 10.50% in September as it is expected to cut borrowing costs by 25 basis points (bps) in the next two meetings on November 14 and December 19. Markets estimate the main benchmark rate to end the year at 10% and at 8% in 2025.

Across the border, last Friday’s US Non-Farm Payrolls (NFP) report prompted the Federal Reserve (Fed) to reverse its rate cuts. Once the news headline showed the economy added more than 254,000 people to the workforce, traders rushed to price in a single 25 bps cut instead of 50.

Meanwhile, Fed officials crossed the lines. Gov. Adriana Kugler said she would “support” more cuts if inflation comes down. Echoing some of her comments, Alberto Musalem of the Fed in St. Louis, said he would go slow with interest rate cuts if it makes sense.

In the US, the program will include many speeches by Fed officials, consumer and producer inflation data and the University of Michigan (UoM) Consumer Sentiment for October.

Daily market reasons: Mexican peso under pressure from strong US dollar ahead of inflation data

• Last Thursday, Mexico’s Supreme Court voted eight to three to “consider a constitutional challenge to the controversial judicial review passed last month,” which would allow Supreme Court judges and magistrates to be chosen by electoral vote.
• According to the Banxico survey, the central bank is expected to cut rates by 50 bps to 10% for the rest of 2024. Meanwhile, the USD/MXN exchange rate will close at around 19.69.
• Mexico’s economy is expected to grow 1.45% in 2024, down from August’s 1.57%.
• After the standout US jobs report, Citi added its name to JPMorgan and Bank of America and changed its call on the November Fed from a 50 bps cut to 25 bps.
• US Treasury yields have soared and supported the US dollar, which continues to appreciate against the peso.
• Data from the Chicago Board of Trade (CBOT) via the fed funds rate futures contract in December show that investors expect 49 bps of easing by the Fed towards the end of 2024.
• Market participants ignored a 50 bps cut. The odds of a 25 bps cut are 85.3%, while the odds of keeping rates unchanged are 14.7%, according to CME FedWatch Tool data.

USD/MXN Technical Outlook: Mexican peso falls as USD/MXN rises above 19.30

Despite falling below the 50-day simple moving average (SMA) at 19.36, USD/MXN remains bullish. Momentum is supporting sellers with the Relative Strength Index (RSI) being in bearish territory. However, the RSI is aiming higher, and in the near term the exotic pair could extend its gains if buyers maintain their momentum.

If USD/MXN breaks above the psychological level of 19.50, look for buyers driving the exchange towards the daily high of 19.82 on October 1 before 20.00. Next will be the YTD peak of 20.22.

For a bearish resumption, if USD/MXN breaks below the October 4 wing low of 19.10, the 19.00 figure will be exposed. Once broken, the next support would be the 100-day SMA at 18.64.