Mexican Peso rises strongly post-reform, boosted by soft USD
|- Mexican Peso climbs after judiciary reform approval with state-level voting underway to finalize the constitutional change.
- Moody’s warns the reform could threaten Mexico’s judicial independence and impact the country’s credit rating.
- Mixed US economic results reduce likelihood of a 50 bps Fed rate cut with upcoming US Consumer Sentiment data in focus.
The Mexican Peso rallied sharply against the Greenback on Thursday following the approval of the judiciary reform on Tuesday. US economic data showed mixed readings, with an uptick in factory inflation and soft jobs data. The USD/MXN trades at 19.46, down over 1.60%.
Mexico’s political turmoil has faded, though the approval of the judicial reform is a certainty. Congresses in 32 states began the approval process, and once voted by a majority in 17 states, it will be declared a law. Aside from this, the economic docket is empty. The next economic release comes on September 18, when INEGI will reveal Aggregate Demand and Private Spending data.
Regarding the judicial reform, Moody’s warned of its impact on Mexico’s credit rating. An analysis emphasizes that “the constitutional change threatens the independence and impartiality of Mexico's judiciary” and “would undermine sovereign credit quality.”
The Greenback remained offered in the US after the US Bureau of Labor Statistics (BLS) revealed that the August Producer Price Index (PPI) figures were mixed. At the same time, the number of Americans filing for unemployment benefits rose as estimated and cleared the previous week's reading.
After the latest consumer and producer inflation reports in the US, expectations for a 50-basis-point (bps) rate cut by the Federal Reserve (Fed) were trimmed. The chances for a 50 bps cut are 15%, while for a 25 bps cut they are 85%, via CME FedWatch Tool data.
USD/MXN will eye the Consumer Sentiment survey released by the University of Michigan on Friday.
Daily digest market movers: Mexican Peso on the front foot after judicial reform approval
- Mexico’s Industrial Production in July offered mixed readings, yet most economists estimate an economic slowdown.
- Inflation in August dipped below the 5% threshold and augmented speculation of additional easing by the Bank of Mexico (Banxico).
- September’s Citibanamex Survey showed that Banxico is expected to lower rates to 10.25% in 2024 and to 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
- BLS revealed that PPI in August rose by 1.7%, below estimates of 1.8%, and core PPI rose from 2.3% to 2.4%, beneath expectations of 2.5%.
- Headline PPI and core increased compared to the previous month's reading. PPI exceeded expectations of 0.1%, expanded by 0.2%, and core PPI rose by 0.3%, up from 0.2%.
- Data from the Chicago Board of Trade suggests the Fed will cut at least 98 basis points this year, up from 108 a day ago, according to the fed funds rate futures contract for December 2024.
USD/MXN technical outlook: Mexican Peso surges as USD/MXN slumps below 19.60
The USD/MXN uptrend remains in place on Thursday despite the ongoing correction for the last two days. Momentum shifted negatively in the pair, as shown by the Relative Strength Index (RSI). This is despite the approval of an unwelcome judicial reform that foreign investors, banks and credit agencies opposed.
In the meantime, the USD/MXN is headed to the downside in the short term. The first support would be the 19.50 area. Once cleared, the next support would be the August 23 swing low of 19.02, shy of the 50-day Simple Moving Average (SMA) at 18.99.
Conversely, the USD/MXN must clear the psychological 20.00 figure for a bullish continuation. If surpassed, the next ceiling level would be the YTD high at 20.22. On further strength, the pair could challenge the daily high of September 28, 2022, at 20.57. If those two levels are surrendered, the next stop would be the swing high at 20.82 on August 2, 2022, ahead of 21.00.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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