The Mexican Peso extended its gains for a third consecutive session against the US Dollar on Friday, buoyed by general weakness in the Greenback. The USD/MXN pair traded at 19.25, marking a 1.30% decline as market expectations of aggressive rate cuts by the Federal Reserve (Fed) bolstered the Peso, despite ongoing concerns about judicial reforms in Mexico.
The focus has been on the US Dollar over the past two trading sessions. On Thursday, investors appeared confident that the Fed might implement a 0.25% rate cut, as indicated by data from the CME FedWatch Tool. However, this sentiment was tempered by a disappointing Initial Jobless Claims report, which overshadowed a rise in the Producer Price Index (PPI).
The CME FedWatch Tool initially pegged the likelihood of a 50-basis-point Fed cut at 28% on Thursday, but this probability has since risen to 43%. Conversely, the chance of a 25-basis-point cut has decreased to 53%. This shift has undermined the Greenback, which fell by 0.17% according to the US Dollar Index (DXY), trading at 101.06.
In the US, the University of Michigan’s Consumer Sentiment Index climbed to 69.0 in September, reaching a four-month high, buoyed by improved inflation expectations. Meanwhile, political stability in Mexico improved following the approval of a judicial system reform bill, which contributed to the Peso’s strength.
Gerardo Carrillo, Regional Director for LATAM at Fitch Ratings, noted that Mexico’s credit outlook remains stable, reflecting a balance of strengths and weaknesses. He suggested that any potential downgrade would more likely come from a shift in the outlook rather than an immediate rating cut.
Bank of Mexico (Banxico) Director of Economic Research Alejandrina Salcedo emphasized that a strong rule of law environment could attract investment and capitalize on opportunities from global relocation trends.
Market Digest:
The Mexican Peso’s rise is supported by ongoing US Dollar weakness, with the USD/MXN expected to be influenced by market sentiment and Fed rate cut expectations.
Next week’s economic data for Mexico will include Aggregate Demand and Private Spending figures for Q2 2024.
Mexico’s inflation rate fell below 5% in August, increasing the likelihood of additional rate cuts by Banxico.
The September Citibanamex Survey forecasts Banxico reducing rates to 10.25% in 2024 and 8.25% in 2025. The USD/MXN exchange rate is expected to end 2024 at 19.50 and 2025 at 19.85.
The University of Michigan’s Consumer Sentiment Index rose from 67.9 to 69.0, surpassing expectations of 68.
Short-term inflation expectations improved from 2.8% to 2.7%, while longer-term expectations increased from 3% to 3.1%.
The US Dollar remained under pressure after mixed August PPI figures and an increase in unemployment claims, with expectations of a Fed rate cut of at least 98 basis points this year, down from 108 a day earlier.
Technical Outlook:
The USD/MXN has sharply retreated below the 20.00 psychological level, with key support levels emerging. The immediate support is at the August 23 low of 19.02. A break below this could lead to further declines towards the 50-day Simple Moving Average at 18.99 and the August 19 cycle low of 18.59.
To reverse the current downtrend, the USD/MXN must surpass the 20.00 mark, with subsequent resistance at the year-to-date high of 20.22 and the September 28, 2022 high of 20.57. Further bullish momentum could push the pair towards the swing high of 20.82 from August 2, 2022, and eventually towards 21.00.
Related Topics:
