• Mexican Peso advance is capped by the Greenback as the economy in the United States (US) remains solid.
  • The OECD predicts a slowdown in Mexico’s economy, largely due to a cooling US economy impacting Mexican exports.
  • Fed Waller’s dovish remarks limit the USD/MXN advance, as traders anticipate over 100 bps rate cuts from Fed in 2024.

Mexican Peso (MXN) falls sharply against the US Dollar (USD) in an early trading session on Wednesday after the US Department of Commerce revealed the economy in the United States (US) is growing above trend, which could warrant further action by the US Federal Reserve’s (Fed). Consequently, the USD/MXN bounces off its daily lows and trades near the highs of the week at 17.21, up 0.40% on the day.

Mexico’s economic docket remains light. On Thursday, October’s unemployment rate is expected to be 2.8%, a tick lower than in September. Meanwhile, the Organization for Economic Co-operation and Development (OECD) released the 2024 economic outlook for Mexico, in which the economy is expected to expand at a slower pace of 2.5%, down from a 3.4% growth rate registered in 2023. The report cites the moderation of the US economy, which would likely dampen Mexico’s exports. The OECD suggests the Bank of Mexico (Banxico) monetary policy must remain restrictive, as inflation is estimated to dip to 3.9% and 3.2% in 2024 and 2025, respectively.

Across the border, the US economy grew faster than expected, the US Bureau of Economic Analysis (BEA) reported, sponsoring a leg-up in the US Dollar Index (DXY), which tracks the performance of the Greenback versus six currencies. The DXY climbs 0.23%, up at 102.95, a headwind for the USD/MXN.

Recently, US Federal Reserve officials had crossed newswires. Atlanta’s Fed President Raphael Bostic said he sees slower growth and falling inflation pressures in the current monetary policy stance. At the same time, Richmond’s Fed President Thomas Barkin commented he is “skeptical” that inflation is on its way to the Fed’s goal, while keeping the option of higher interest rates.

Daily digest movers: Mexican Peso weakens as the USD/MXN rises to 17.15 following US data

  • The US Gross Domestic Product (GDP) for Q3 rose by 5.2% QoQ, exceeding estimates of 5%.
  • The US Advancement Goods Trade Balance registered a deficit of $89.8 billion in October, widening $3.5 billion from the $86.3 deficit in September.
  • On Tuesday, Fed Governor Christopher Waller, a former hawk, commented that there are good economic arguments that rates could be lowered if inflation continues falling for several months.
  • A day after Fed Waller’s comments showed interest rates, traders expect 115 basis points of rate cuts by the US central bank in 2024.
  • On November 27, Banxico’s Deputy Governor, Jonathan Heath, commented that core prices must come down more, adding that one or two rate cuts may come next year, but “very gradually” and “with great caution.”
  • On November 24, a report revealed the economy in Mexico grew as expected in the third quarter on an annual and quarterly basis, suggesting the Bank of Mexico would likely stick to its hawkish stance, even though it opened the door for some easing.
  • Mexico’s annual inflation increased from 4.31% to 4.32%, while core continued to ease from 5.33% to 5.31%, according to data on November 23.
  • The financial markets’ narrative that the US Federal Reserve (Fed) is done hiking rates has kept the Greenback on the backfoot, but today, it has found some relief.
  • Data published earlier this month showed prices paid by consumers and producers in the US dipped, increasing investors’ speculations that the Fed’s tightening cycle has ended.
  • A Citibanamex poll suggests that 25 of 32 economists expect Banxico’s first rate cut in the first half of 2024.
  • The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
  • The same survey revealed that economists foresee headline annual inflation at 4.00% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024

Technical Analysis: Mexican Peso loses strength though the USD/MXN bias remains bearish below the 200-day SMA

Even though the USD/MXN reached a new week high of 17.22, buyers barely cling to minuscule gains. The 20-day Simple Moving Average (SMA) is about to cross below the 100-day SMA, both at around 17.34, signaling the downtrend is gaining steam. If the pair drops below 17.05, the next support would be the 17.00 figure, ahead of challenging the year-to-date (YTD) low of 16.62.

Conversely, if buyers achieve a daily close above the November 21 high at 17.26, that would put into play a test of the confluence of the 20 and 100-day SMAs at 17.34. Further upside is seen at the 200-day SMA at 17.58.

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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