Mexican Peso sprints ahead on US Fed officials' dovish comments

• Mexican Peso gathers momentum, breaks below 18.00 on overall US Dollar weakness.
• Mexico's prices continue to deflate, though the Bank of Mexico is likely to maintain rates at 11.25% for year-end.
• USD/MXN has fallen to a new three-day low at around 17.97, bolstered by a risk-on impulse.

Mexican Peso (MXN) rallies for the third consecutive trading day against the US Dollar (USD) as risk appetite is back on the financial markets, while the sudden plunge in US Treasury bond yields takes its toll on the Greenback (USD). US Federal Reserve (Fed) officials adopted a neutral stance, mentioning that high US bond yields on the long-term of the curve “may mean there is less need to raise Fed rates further,” according to Dallas Fed President Lorie Logan. Therefore, the USD/MXN is exchanging hands at around 17.98 after hitting a multi-month high at around 18.49.

The latest economic data in Mexico showed that inflation is decelerating, approaching the Bank of Mexico (Banxico) 3% plus or minus 1% target. Even though the data might suggest the Mexican central bank could shift its approach toward easing its monetary policy, officials expressed their desire to keep rates higher for longer. Aside from this, reports suggesting that China might consider a new round of stimulus sparked a risk-on impulse, as seen by the USD/MXN pair diving beneath the 18.00 figure.

Daily Digest Market Movers: Mexican Peso could test the 18.00 figure on sentiment improvement

• Atlanta’s Fed President Raphael Bostic: “We don’t need to increase rates anymore.”
• The US 10-year Treasury bond yield has dropped to a new six day low of 4.632%, a headwind for the USD/MXN.
• Wall Street is trading with solid gains of between 0.70% and 1.17%, portraying the improvement in risk appetite.
• Mexico's auto parts industry is expected to register a $412 million hit to production by Friday, spurred by the United Auto Workers (UAW) union strike in the US.
• Mexico’s Consumer Price Index (CPI) grew by 4.45% YoY in September, below the 4.47% of estimates.
• The core CPI inflation in Mexico stood stickier at 5.76% YoY, as widely estimated, but has broken below the 6% threshold.
• A Citi Banamex poll showed economists estimate headline inflation at 4.70% and core at 5.09% for the year’s end.
• Analysts polled by Citi Banamex foresee the USD/MXN to end 2023 at 17.80, up from 17.60, and for 2024 at 18.86, up from 18.70 two weeks ago.
• Banxico’s September poll amongst economists reported that interest rates are expected to remain at 11.25% while inflation would dip to 4.66%.
• The same poll shows the USD/MXN exchange rate is set to finish at around 17.64, down from 17.75.
• The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
• Banxico’s Government Board highlighted Mexico’s economic resilience and the strong labor market as the main drivers to keep inflation at the current interest rate level.

Technical Analysis: Mexican Peso strengthens, USD/MXN at the brink of dropping below 18.00

Mexican Peso has regained its composure, with the USD/MXN pair gaining downward traction toward the 18.00 figure due to overall US Dollar weakness. Even if the USD/MXN drops below 18.00, sellers must claim key support levels on the way down to regain control and retest the September 30 low of 17.34. First, the 200-day Simple Moving Average (SMA) at 17.78, followed by the 20-day SMA at 17.54. Conversely, if USD/MXN buyers manage to keep the exchange rate above 18.00, that could pave the way to re-test October’s high of 18.48 before challenging 18.50.