Mexican Peso skyrockets as Fed keeps rates unchanged, traders eye possible early 2024 rate cut
|- Mexican Peso rallies sharply against the US Dollar, with USD/MXN plunging more than 1.50% to 17.76.
- Federal Reserve's unanimous decision to keep rates steady highlights commitment to 2% inflation target.
- Traders bet on end of Fed rate hikes, with first-rate cuts anticipated in June 2024, odds at 68.02%.
Mexican Peso (MXN) rallied sharply against the US Dollar (USD) on Wednesday as market sentiment shifted positively due to the Federal Reserve’s (Fed) decision to hold rates unchanged, though despite leaving the door open for further tightening, traders already priced in the Fed’s ended its tightening cycle. The USD/MXN is plunging more than 1.50%, trading at 17.76, well below the psychological 18.00 figure.
The Federal Reserve's decision to keep rates steady was unanimous. In its monetary policy statement, Fed policymakers acknowledged steady economic expansion in the third quarter and mentioned a moderation in job gains. However, they also highlighted that inflation remains too high and emphasized their commitment to returning inflation to its 2% target.
According to Reuters, US short-term interest rate futures are added to earlier gains as traders bet Fed rate hikes have ended. Additionally, the first-rate cuts are eyed at June 2024.
In the meantime, Fed Chair Jerome Powell's press conference failed to reassure investors that further tightening is needed, though having him saying “We have come very far with this rate-hike cycle and are close to end of the cycle,” sponsored another leg-down on the USD/MXN, as market participants are not expecting another rate hike. According to the CME FedWatch Tool, traders expect the first rate cut by June 2024, with odds at 68.02%.
Earlier, the US economic docket revealed the ADP Employment Change report for October, which showed the economy adding 113K private jobs, above September’s 89K but missing estimates of 150K. Other data witnessed manufacturing activity weakening, as the Institute of Supply Management (ISM) announced that October’s Manufacturing PMI dropped below the 50 contraction/expansion midline, at 46.7 for the previous twelve months in a row, below the consensus and September’s 49.0 reading.
Additional data from the US Department of Labor revealed that job openings in September rose by 9.553 million, above estimates of 9.25 million and August’s 9.497 million vacancies reported a month ago.
Aside from this, S&P Global revealed October’s Manufacturing PMI, which showed an improvement from 49.8 to 52.1, but the main headlines are around Acapulco’s tragedy after Hurricane Otis. Mexican President Lopez announced a recovery plan, including tax breaks, financial assistance and social welfare payments. The Mexican Finance Minister said that 61 billion pesos in investment would be required for Acapulco.
Daily digest movers: Mexican Peso rallies sharply as the USD/MXN falls off cliff below 17.80
- US ADP Employment Change in October climbed to 113K, better than the previous month, but missed forecasts of 150K.
- The ISM Manufacturing PMI dropped to recessionary territory at 46.7 in October, below forecasts and September’s 49 reading.
- September’s JOLTs job report showed openings rose by 9.553 million, above forecasts of 9.25 million, and August’s 9.497 million.
- Mexico’s Business Confidence in October improved to 54 from 53.8.
- Mexico S&P Global October Manufacturing PMI at 52.1, above September’s 49.8.
- Mexico’s Gross Domestic Product grew by 0.9% QoQ in the third quarter on its preliminary reading, above the previous quarter and estimates of 0.8%.
- On a yearly basis, Mexico’s GDP for Q3 expanded by 3.3%, above forecasts of 3.2% but trailing the previous 3.6%.
- According to Enki Research, a firm specializing in natural disasters, the first estimates of Hurricane Otis's damages are around $10 to 15 billion.
- Mexican authorities reported that around 270,000 houses in Acapulco were affected or destroyed, while 80% of hotels were severely damaged.
- The US agenda will feature the Fed’s decision and Chair Jerome Powell’s press conference.
- On October 24, Mexico's National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September, below forecasts of 4.38%.
- Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
- The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9.
Technical Analysis: Mexican Peso buyers target the 200-day Simple Moving Average
The USD/MXN uptrend is at risk of being reversed as the exotic pair plunged below 18.00, leaving the 20-day Simple Moving Average (SMA) standing behind at 18.10. The trouble is rising that the 200-day SMA at 17.72 is about to be tested.
A breach of the last and subsequent support would be the 50-day SMA at 17.58. On the flip side, USD/MXN buyers must reclaim the 18.00 psychological figure to have a chance of reclaiming the 20-day SMS at 18.10 before targeting the October 26 high at 18.42 before challenging last week’s high at 18.46, ahead of the 18.50 figure.
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is "risk-on"?
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.
Which currencies strengthen when sentiment is "risk-off"?
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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