Mexican Peso advances but is not out of the woods yet

Most recent article: Mexican Peso rallies for the second straight day amid soft US ADP jobs data

Mexican Peso stages a comeback but faces strong support as USD/MXN hovers above the 100-day SMA.
Mexico's Thursday inflation report could thwart the Bank of Mexico’s easing plans.
USD/MXN traders are eyeing important US jobs data ahead of the important Nonfarm Payrolls on Friday.

Mexican Peso (MXN) staged a recovery on Tuesday after registering earlier loses against the US Dollar (USD) in the North American session after the USD/MXN briefly tested the 200-day Simple Moving Average (SMA), a critical resistance level. Nevertheless, the pair reversed its course and is trading in the red, at around 17.40, losing 0.24% on the day.

Mexico’s economic calendar remains light on Tuesday, but it will gather some pace on Wednesday, with the release of Consumer Confidence for November, after October’s data printed 46. If confidence slips below the prior month’s figure, it would be the third straight reading that Mexican households are shifting pessimistic on the economic outlook. On Thursday, the National Statistics Agency, known as INEGI, will reveal inflation for November, with most economists expecting a higher rate than in October. That could prevent the Bank of Mexico (Banxico) from easing policy, despite recent comments by Governor Victoria Rodriguez Ceja and Deputy Governor Heath.

Aside from this, the Mexican currency remains stressed as market sentiment turns sour. The financial markets narrative suggests traders had become overly optimistic about rate cuts by the Federal Reserve (Fed). On the data front, the US JOLTs report showed the labor market is easing, while both Services PMI readings revealed by S&P Global and the Institute for Supply Management (ISM) showed the US economy remains resilient.

Daily digest movers: Mexican Peso gains traction as traders await Mexico’s inflation report

Banxico revised economic growth upward from 3% to 3.3% for 2023 and projects the economy will rise 3% in 2024, from 2.1% previously forecast.
Regarding inflation prospects, the Mexican central bank foresees headline inflation at 4.4% in Q4 2023 (5.3% for core), while at the end of 2024, it is estimated at 3.4% (3.3% for core). The central bank forecasts headline and core inflation not to hit the 3% target imposed by the institution until 2025.
The Federal Reserve's favorite inflation gauge in October, the Core PCE Price Index rate softened from 3.7% to 3.5% YoY. Moreover, headline PCE inflation dropped from 3.4% to 3.0% YoY for the same twelve-month period.
On November 27, Banxico’s Deputy Governor, Jonathan Heath, commented that core prices must come down more, adding that one or two rate cuts may come next year, but “very gradually” and “with great caution.”
Mexico's annual inflation increased from 4.31% to 4.32%, while core continued to ease from 5.33% to 5.31%, according to data on November 23.
A Citibanamex poll suggests that 25 of 32 economists expect Banxico's first rate cut in the first half of 2024.
The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
The same survey revealed that economists foresee headline annual inflation at 4.00% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024

Technical Analysis: Mexican Peso weakens further, as the USD/MXN hovers around the 200-day SMA

The USD/MXN popped and printed a three-week high of 17.56, piercing the 200-day SMA at 17.56, before retracing below the 17.50 area, with bulls taking a breather, as volatility continues to pick up. A decisive breach above the 200-day SMA could open the door to challenging the 50-day SMA at 17.69, ahead of the May 23 swing high at 17.99.

On the other hand, if the exotic pair fails at the 200-day SMA, that could pave the way to challenge the 100-day SMA at 17.37. The next demand zone would be the December 4 daily low of 17.16.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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