Mexican Peso surges in anticipation of Mexico's Q3 GDP and upcoming Fed decision

• Mexican Peso hovers around 18.08, down 0.09% on risk-on mood.
• Mexico’s Q3 GDP is expected to expand 3.1% YoY and 0.8% QoQ.
• USD/MXN traders await the US Federal Reserve monetary policy meeting, expecting unchanged rates.

Mexican Peso (MXN) registers solid gains against the US Dollar (USD) in the mid-North American session, as Oil prices retreated last Friday’s gains, with the USD/MXN hovering around the 20-day Simple Moving Average (SMA), eyeing a recovery past the 18.10 mark. At the time of writing, the pair is still losing 0.31%, trading at around 18.04.

Mexico’s currency continues to remain underpinned by equity indices in the United States (US) as Wall Street shrugs off Israel's offensive on the Gaza Strip, with fears of a spillover contained.

Hurricane Otis impacted Acapulco, in the southern state of Guerrero, over the weekend, likely weighing on the country’s finances, as the FONDEN – a trust created by previous Mexican government administrations to respond to natural disasters – disappeared since President Andres Manuel Lopez Obrador’s administration began.

Enki Research calculated Initial estimates of damages at around $828 million US Dollars. Still, according to Chuck Watson, a disaster modeler with the former, the economic impact could likely total $10 billion to $15 billion, as revealed by Bloomberg.

In the meantime, USD/MXN traders are eyeing the release of a busy US economic schedule, highlighted by the US Federal Reserve (Fed) monetary policy meeting on November 1, which is expected to hold rates unchanged. Odds for a 25 bps increase to the Federal Funds Rate (FFR) are at 1.4%, as shown by the CME FedWatch Tool.

Daily digest movers: Mexican Peso as the mercy of the Fed, and market sentiment

• First estimates of Hurricane Otis damages stand at around $10 to 15 billion dollars, according to Enki Research, a firm specializing in natural disasters.
• Mexican authorities reported that around 270,000 houses in Acapulco were affected or destroyed, while 80% of hotels were severely damaged.
• The October US Dallas Fed Manufacturing Index plunged to -19.2, worse than September 18.1.
• Elevated US Treasury bond yields, particularly the 10-year benchmark note, rose five basis points to 4.89%, capping the USD/MXN drop despite overall US Dollar weakness.
• The US Dollar Index, which tracks the performance of the Greenback against six currencies, slides 0.40%, down at 106.15.
• Mexico’s economic docket would feature the release of the Fiscal Balance, Gross Domestic Product for Q3, S&P Global Manufacturing PMIs, Foreign Exchange Reserves, and Gross Fixed Investment.
• The US agenda will feature the Fed’s decision, Fed Powell’s press conference, employment data, and S&P Global and ISM Manufacturing PMIs.
• 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%.
• Earlier this week, S&P Global Manufacturing PMIs evidenced expansion in US manufacturing and service sectors during October.
• 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%).

Technical Analysis: Mexican Peso buyers target the 200-day Simple Moving Average

The USD/MXN uptrend remains intact despite Friday’s dip below the 18.00 figure, which puts the 20-day Simple Moving Average (SMA) at 18.10 at risk of being decisively broken to the downside. A daily close below the latter could pave the way for a test of the 200-day SMA at 17.72. A breach of the last and the subsequent support would be the 50-day SMA at 17.55. On the flip side, if the exotic pair remains above the 20-day SMA, the next resistance will emerge at the October 26 high at 18.42 before challenging last week’s high at 18.46, ahead of the 18.50 figure.

GDP FAQs

What is GDP and how is it recorded?

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

How does GDP influence currencies?

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

How does higher GDP impact the price of Gold?

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.