Mexican Peso extends weakness after Mexican inflation cools

Most recent article: Mexican Peso slides for fourth day as inflation edges down toward Banxico goal

• The Mexican Peso depreciates further in its key pairs after inflation data and GDP miss estimates on Thursday.  
• USD/MXN shrugged off negative economic news from the US and continued rising on Wednesday. 

The Mexican Peso (MXN) extends losses in its key pairs on Thursday after the release of Mexican inflation data misses estimates and headline inflation registers a decline. The Peso's weakness broadens the trend of the last few days, which has seen MXN lose 1.50% to 1.90% on Wednesday after a similar decline on Tuesday. 

Mexican Peso depreciates after inflation undershoot

The Mexican Peso weakens in its key pairs on Thursday after the release of 1st half-month Inflation for August shows a decline of 0.03% compared to the 0.71% rise in July. The result also fell below economists' estimates of 0.12%. 

1st half-month Core Inflation in Mexico, meanwhile, cooled to 0.10% from 0.18% in the previous release, and missed expectations of 0.19%, according to data from INEGI. 

The slower inflation weighs on the Peso as it makes it more likely the Banco de Mexico (Banxico) will move to cut interest rates again in the near term. Lower interest rates are negative for a currency as they reduce foreign capital inflows. 

The second estimate for GDP showed a 0.2% rise QoQ in Q2 in line with the preliminary reading and estimate. GDP was revised down to 2.1% YoY in Q2, however, from the 2.2% initial estimate.  

EUR/MXN impacted by Eurozone data

EUR/MXN has fallen back slightly after the release of preliminary German Purchasing Manager Index (PMI) data for August which measures activity in major industry sectors. The data came out lower-than-expected for Composite, Manufacturing and Services PMIs, suggesting a slowdown in Europe's largest economy.  

Negotiated Wage Rates in the Eurozone rose by a slower 3.55% in Q2 on the quarter compared to an upwardly-revised 4.74% previously, according to data from the European Central Bank (ECB) released Thursday. This suggests wage inflation could ease leading to lower interest rates in the region, with potentially negative implications for the Euro (EUR). 

The negative German PMI data was partially offset by Eurozone HCOB PMIs, however, which revealed more mixed results.

The Eurozone HCOB Composite PMI rose to 51.2 in August from 50.2 in July when a decline to 50.1 had been expected. HCOB Manufacturing PMI fell to 45.6 from 45.8 when no-change had been forecast. Services PMI casme out at 53.3 from 51.9 when no-change had been forecast.  

GBP/MXN gets a slight lift, meanwhile, from UK S&P Global/CIPS PMI data which beat previous results and economists' expectations for Composite, Services and Manufacturing sectors. 

At the time of writing, one US Dollar (USD) buys 19.30 Mexican Pesos, EUR/MXN trades at 21.51, and GBP/MXN at 25.30.

Mexican Peso weakens against USD despite weak US data

The Mexican Peso’s 1.50% fall against the US Dollar (USD) on Wednesday came about despite the release of broadly negative Bureau of Labour Statistics (BLS) revisions to Nonfarm Payrolls and the US Federal Reserve’s (Fed) July meeting Minutes, which revealed policymakers are more open to cutting interest rates. The expectation of lower interest rates is generally negative for a currency as it reduces foreign capital inflows. 

The US Bureau of Labour Statistics (BLS) released their revisions for Nonfarm Payrolls in the year to March 2024 and these showed an aggregate downward revision of 818,000 to payrolls for the previous 12 months, which translates to an average of 68,000 per month. This is likely to add to concerns regarding the health of the US labor market and the US economy experiencing a hard landing. This is especially the case in light of the “flash crash” that followed the release of a weak July NFP number, which came out below expectations at 114,000, whilst the US Unemployment Rate edged up another notch to 4.3%.  

Although the US Dollar outperformed the Peso, the US Dollar Index (DXY) – which tracks the value of the Dollar against a trade-weighted basket of counterparts – did hit a new year-to-date low during the Asian session on Wednesday before rebounding, prior to the release of the weak BLS data and the Fed Minutes.

Technical Analysis: USD/MXN extends new leg higher

USD/MXN extends its gains, further reversing the prior evolving down leg within the pair’s broader rising channel. 

The long green up days posted on Tuesday and Wednesday could indicate the short-term trend is changing and the pair may be about to begin a new up leg within the channel.

USD/MXN Daily Chart 

USD/MXN had been looking like it was unfolding in a bearish abc pattern within its rising channel, however, wave “c” has failed to extend all the way down to the lower channel line. 

The pair has also now broken above the top of wave “b” at 19.10, tilting the odds in favor of bulls. The break could indicate a stronger up move is underway, that could take the pair back up to the channel highs at roughly 20.50.  

The overall trend on the medium and longer-term time frames is arguably up, suggesting a bullish backdrop that provides extra support to the view that a new upward move is underway.