Mexican Peso surges as Unemployment Rate dips, USD falls

Mexican Peso gains 0.25%, buoyed by strong employment figures and general USD weakness.
Despite positive US JOLTs data, Banxico's willingness for bigger rate cuts supports MXN's strength.
Mixed Fed signals on rate cuts; upcoming US labor data could impact Fed's December policy decision.

The Mexican Peso recovers some ground on Tuesday and climbs against the US Dollar, sponsored by positive jobs data and overall weakness in the American currency. The Greenback weakened despite an upbeat Job Openings & Labor Turnover (JOLTs) report in the US, which could prevent the Federal Reserve (Fed) from easing policy at the December meeting. At the time of writing, the USD/MXN trades at 20.32, down by 0.25%.

Mexico’s National Statistics Agency ( INEGI) revealed that the labor market remains solid, which justified the Bank of Mexico's (Banxico) easing cycle. Despite this, other data showed that Gross Fixed Investment contracted in September.

On Monday, the Mexican Institute of Finance Executives (IMEF) revealed that the economy is showing signs of stagnation despite modest improvements in the manufacturing and services sectors.

According to November's meeting minutes, Banxico hinted last week that they’re willing to consider bigger rate cuts.

Across the border, the October US JOLTs data paint an optimistic outlook for the Fed, which hinted that the risks of achieving its dual mandate had shifted from price stability to maximum employment. Nevertheless, positive JOLTs data, followed by upbeat Initial Jobless Claims on Thursday and Nonfarm Payrolls (NFP) on Friday, could pave the way for the Fed to pause cutting rates.

Fed Governor Christopher Waller crossed the newswires on Monday. He stated he’s inclined to vote for a rate cut at the December meeting, but further data could make a case for holding rates steadily.

Other Fed regional presidents, like New York's John Williams and Atlanta’s Raphael Bostic, commented that the economy is strong and that the disinflation process continues to move toward its target. They added that further cuts are needed but fell shy of expressing how they would vote in the next two weeks.

Ahead this week, Mexico’s schedule will feature the release of automobile production data. In the US, the docket will feature Fed speakers, S&P and ISM Services PMI surveys, Initial Jobless Claims and NFP figures.

Daily digest market movers: Mexican Peso shrugs off Banxico’s dovish posture

INEGI revealed the Mexican Unemployment Rate in October dipped from 2.9% to 2.5% YoY, below the consensus of 2.9%.
INEGI reported that Gross Fixed Investment in September improved from -2.2% to -0.8% MoM. However, on an annual basis, investment plummeted by -3.3% from a 0.5% expansion and below estimates of 0%.
The latest Citi Mexico survey showed that most economists estimate Banxico will cut rates by 25 basis points at the December meeting. Analysts project the economy will grow 1.5% in 2024 and 1% in 2025.
The October JOLTS report showed that job vacancies came to 7.744 million, exceeding estimates of 7.48 million and September’s 7.372 million registered.
The CME FedWatch Tool suggests that investors see a 70% chance of a 25-basis-point (bps) rate cut at the Fed’s December meeting.
Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 17 bps of Fed easing by the end of 2024.
Banxico’s November survey shows that analysts estimate inflation at 4.42% in 2024 and 3.84% in 2025. Underlying inflation figures will remain at 3.69% in 2024 and 2025. GDP is forecasted at 1.55% and 1.23% for 2024 and 2025, respectively, and the USD/MXN exchange rate at 20.22 for the rest of the year and 20.71 in 2025.

Mexican Peso technical outlook: USD/MXN tumbles below 20.50 on Peso’s strength

The USD/MXN is upwardly biased overall despite retreating below the 20.50 figure, an indication of the Peso’s strength. Momentum shows that sellers are gathering steam, as depicted by the Relative Strength Index (RSI), which despite being bullish has a slope that trends downward toward its neutral line.

Hence, the USD/MXN is bearishly biased in the short term. However, sellers must clear the 20.00 mark, so they can challenge the 50-day Simple Moving Average (SMA) at 19.96. A breach of the latter will expose the 100-day SMA at 19.61 before the psychological 19.00 figure.

Conversely, if USD/MXN reclaims 20.50, the next resistance would be the year-to-date peak at 20.82. If surpassed, the next stop would be 21.00, ahead of March 8, 2022 peak at 21.46, followed by the November 26, 2021 high at 22.15.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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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