Mexican Peso sinks and hits five-week low

Mexican Peso weakened as US Dollar gains despite falling US yields.
IMF downgrades Mexico's 2024 GDP growth outlook, citing capacity constraints and tight monetary policy.
US import prices fell sharply in September, while Fed’s Bostic remains optimistic about inflation hitting the 2% target.

The Mexican Peso depreciated in early trading on Wednesday as the US Dollar strengthened amid a mixed market mood with falling US Treasury yields. Softer inflation readings among developed countries suggest that further easing is coming, indicating that the global economy might slow down. The USD/MXN trades at 19.97, registering gains of 1.32%.

US equities are fluctuating as traders shifts focus toward small caps as the Russell 2000 outperforms the NASDAQ and S&P 500. Therefore, emerging market currencies sensitive to risk, like the Peso, remained on the back foot.

On Tuesday, the International Monetary Fund (IMF) revised Mexico’s economy downward to 1.5% in 2024 due to capacity constraints and a restrictive monetary policy. This is well below the 2.4% estimated by the Secretaria de Hacienda y Credito Publico (SHCP).

The IMF estimates GDP growth for the next year at 1.3% as inflation closes in on the Bank of Mexico’s (Banxico) 3% objective.

On the US front, the docket revealed that import prices fell the most in nine months in September due to the fall of energy prices. Meanwhile, Export prices fell on monthly and annual figures.

On Tuesday, Atlanta’s Fed President Raphael Bostic commented the US economy is performing well, and that he’s confident that inflation will hit the 2% target. He doesn’t foresee a recession, though he expects inflation to remain choppy and employment robust.

Ahead in the week, Thursday’s economic docket will feature the release of Retail Sales, Initial Jobless Claims, Industrial Production and further Fed speakers.

Daily digest market movers: Mexican Peso slumps as USD/MXN surges past 19.80

Earlier during the North American session, the Mexican Peso touched a five-week low as the USD/MXN hit a high of 19.93, shy of the psychological 20.00 figure.
The IMF said that a recent judicial reform creates "important uncertainties about the effectiveness of contract enforcement and the predictability of the rule of law."
Banxico’s survey revealed that economists estimate the central bank will lower rates by 50 bps for the rest of the year. The USD/MXN exchange rate is projected to end at 19.69, and the economy is expected to grow by 1.45% in 2024.
US Import Prices plunged -0.4% MoM as expected in September. Export prices plummeted -0.7% more than estimates of -0.4% contraction and less than August’s -0.9%.
Data from the Chicago Board of Trade via the December fed funds rate futures contract shows investors estimate 50 bps of Fed easing by the end of the year.

USD/MXN technical outlook: Mexican Peso nosedives as buyers eye USD/MXN at 20.00

The USD/MXN uptrend remains intact as the pair briefly surpassed 19.90 to hit multi-week highs. Momentum remains bullish as the Relative Strength Index (RSI) depicts. This would exert upward pressure on the exotic pair, which could clear the 20.00 figure as traders brace for safety ahead of the US election.

The USD/MXN next ceiling level would be 20.00. If surpassed, the next resistance would be the YTD high of 20.22, before challenging 20.50.

On the flip side, if USD/MXN tumbles below the October 1 high turned support at 19.82, it could exacerbate a test of the October 10 daily peak at 19.61. On further weakness, the next floor will be the October 4 swing low of 19.10 before testing 19.00.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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