Mexican Peso rallies against US Dollar on expectations Fed is done hiking rates

• Mexican Peso extends rally against the US Dollar, with USD/MXN dropping below 200-day SMA.
• Federal Reserve holds rates steady, with Chair Jerome Powell's remarks perceived as hinting at the end of the rate hike cycle.
• Money market players estimates the Fed’s first rate cut by June 2024, a headwind for the USD/MXN

Mexican Peso (MXN) extends its rally against the US Dollar (USD), with the USD/MXN dropping below the important technical 200-day Simple Moving Average (SMA), as market participants speculate the US Federal Reserve (Fed) is done hiking rates after Wednesday’s decision. The fall in Treasury bond yields in the United States (US) dampens appetite for the American Dollar (USD). The USD/MXN pair trades below 17.60, registering losses of nearly 1% on the day.

On Wednesday, the Federal Reserve held the target range for federal funds rate steady at 5.25%-5.50% without changing the tone of the monetary policy statement. After that, Fed Chair Jerome Powell struck the markets with some hawkish remarks, although adding that “we have come very far with this rate-hike cycle and are close to end of the cycle.”.

Regarding the latter, money market players are indeed pricing in the Fed is done raising rates, with December odds of keeping rates on hold at 80%, as traders expect the first rate cut in June 2024. The odds for a 25 bps cut are at 67.80%.

Thursday's data revealed the Fed’s decision to pause was justified as unemployment claims for the last week rose above estimates and the prior week’s data, extending the uptrend to six straight weeks, while Unit Labor Costs unexpectedly declined in the third quarter. On the other hand, Factory Orders jumped above August’s and forecasts by analysts, as the US economy continues to show resilience and keeps growing above trend.

Nevertheless, market participants’ focus would shift towards the US Nonfarm Payrolls report for October, which is expected to show the economy added just 180K jobs with the Unemployment Rate foreseen at 3.8%. Due to the extension of the Greenback’s losses, a better-than-expected report could rock the boat sharply and catch traders off guard.

On the Mexican front, the economic docket featured the release of Foreign Exchange Reserves. The Bank of Mexico – also known as Banxico –reported that “reserves in Mexico decreased to 209,626 USD Million in September from 210,385 USD Million in August of 2023.”

Daily digest movers: Mexican Peso climbs sharply on Fed’s dovish hold

• US Initial Jobless Claims for the week ending October 28 rose by 217K, exceeding estimates and the previous week's figures at 210K and 212K, respectively.
• Factory Orders in September grew surprisingly, coming at 2.8% MoM, above forecasts of 2.3% and August 1%.
• US ADP Employment Change in October climbed to 113K, better than the previous month, but missed forecasts of 150K.
• The ISM Manufacturing PMI dropped to contractory territory at 46.7 in October, below forecasts and September’s 49 reading.
• September’s JOLTs job report showed openings rose by 9.553 million, above forecasts of 9.25 million, and August’s 9.497 million.
• Mexico S&P Global October Manufacturing PMI at 52.1, above September’s 49.8.
• Mexico’s Gross Domestic Product grew by 0.9% QoQ in the third quarter on its preliminary reading, above the previous quarter and estimates of 0.8%.
• On a yearly basis, Mexico’s GDP for Q3 expanded by 3.3%, above forecasts of 3.2% but trailing the previous 3.6%.
• According to Enki Research, a firm specializing in natural disasters, the first estimates of Hurricane Otis's damages in Mexico are around $10 to 15 billion.
• On October 24, Mexico's National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September, below forecasts of 4.38%.
• Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
• The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9.

Technical Analysis: Mexican Peso buyers conquered the 200-day Simple Moving Average, USD/MXN eyes 17.50

The USD/MXN finally plunged below the 200-day Simple Moving Average (SMA) at 17.70, extending its losses toward the 50-day SMA at 17.61. A daily close below those two crucial support levels, and the pair could prolong its slide towards the September 29 daily low at 17.34.

On the other hand, if USD/MXN buyers stepped in and reclaimed the 200-day SMA, that could open the door to recovering the psychological 18.00 figure. A breach of the latter could expose a rally to the 20-day SMA at 18.06 before targeting the October 26 high at 18.42 before challenging last week’s high at 18.46, ahead of the 18.50 figure.