Mexican Peso plummets as the week begins on strong US Dollar

• Mexican Peso falls to seven-week low as trade deficit hits worst level since August 2020.
• INEGI data shows Mexican exports and imports plunged, with exports contracting 5.7% YoY.
• Upcoming US economic reports and FOMC decision expected to keep USD/MXN rally alive.

The Mexican Peso depreciated sharply as the week began after data revealed Mexico’s Balance of Trade deficit widened — its worst reading since August 2020, according to data revealed by the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI). This, along with the strength of the US Dollar, keeps the USD/MXN trading at 18.67, gaining more than 1.20%.

INEGI revealed that Mexico’s Exports and Imports plunged, though the former contracted -5.7% YoY, the steepest drop in 46 months. The data weighed on the Mexican Peso, which weakened to a seven-week low as the USD/MXN accelerates toward testing the year-to-date (YTD) high of 18.99.

The US economic docket will be busy. Market participants prepare for the Federal Open Market Committee (FOMC) monetary policy decision, the release of the Institute for Supply Management (ISM) Manufacturing PMI, and the Nonfarm Payrolls (NFP) report, both figures for August and July, respectively.

This and month-end flows favoring the Greenback will likely keep the USD/MXN exotic pair upwardly pressured. Although the FOMC is expected to hold rates unchanged and lay the ground for the Federal Reserve's (Fed) first interest rate cut, investors underpinned the buck ahead of the decision.

MUFG Bank wrote in a note, “The unwind of high-yielding Latam FX carry trades over the past week has also been triggered by more risk-off trading conditions.” Wall Street confirmed this, with most US equity indices retreating from all-time highs, while safe-haven currencies like the Japanese Yen, the Swiss Franc and the Greenback advanced.

Daily digest market movers: Mexican Peso undermined by wider deficit

• Mexico’s Balance of Trade in June was $-1.073 billion, missing the consensus of $1 billion.
• According to Citi Research, analysts now estimate that annual inflation will end at 4.30%, up from the previous forecast of 4.20%, with core inflation expected to finish 2024 at 4.0%. Mexico's economic growth is projected to slow with an expected growth rate of 1.9%, down from 2.0% in the last poll.
• Last week’s US inflation data suggested that progress toward lowering it to 2% continues, yet it seems stickier than expected after June’s Core PCE figures were above estimates in monthly and yearly figures.
• USD/MXN traders are awaiting the release of JOLTs Job Openings for June, ahead of the ADP Employment Change and FOMC’s decision on Wednesday.
• Data by the Chicago Board of Trade (CBOT) shows that traders are pricing in 54 basis points (bps) of easing toward the end of the year, as shown by the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso extends losses as USD/MXN closes to 18.70

The uptrend continues, as shown by the USD/MXN hitting the 18.70 mark due to month-end flows and risk-aversion, which has undermined high-yielding currencies like the Peso. Momentum is bullish, confirmed by the Relative Strength Index (RSI) reading above the 50-neutral line.

If bulls challenge the YTD high at 18.99, that could open the door to test 19.00. Once surpassed, the next resistance would be the March 20, 2023, peak at 19.23 before challenging 19.50.

Conversely, if USD/MXN retreats beneath 18.00, that would pave the way to challenge the 50-day Simple Moving Average (SMA) at 17.89, the first support level. The next support would be the latest cycle low of 17.58; the July 12 high turned support. A breach of the latter will expose the January 23 peak at 17.38.