Mexican Peso weakens against US Dollar on risk aversion despite Fed rate cut speculation

• Mexican Peso gets hit by sentiment shifting, down 0.13% against Greenback.
• Mexico’s economy continues to slow down amid the ongoing disinflation process.
• Expectations that Banxico would begin easy monetary policy in Q1 2024 could pave the way for further upside in USD/MXN.

The Mexican Peso (MXN) made a U-turn after posting solid gains versus the US Dollar (USD) on Friday, weakening amid thin liquidity conditions in the observance of Martin Luther King (MLK) day in the United States (US). The emerging market currency is soft despite interest rate traders expecting the US Federal Reserve (Fed) to cut rates by 170 basis points in 2024, undermining the prospects of the buck. Nevertheless, the USD/MXN exchanges hands at 16.90 on Monday, gaining 0.23%.

Risk aversion is taking its toll on European stocks, bolstering the Greenback (USD), a headwind for the Mexican currency. Even though the Peso continues to edge lower, futures positions on the Mexican Peso show investors had remained long for the last 44 weeks, according to data revealed by the Chicago Board of Trade (CBOT). Net speculative contracts rose by 88,439 longs, -0.7% less than last week’s 89,100.

Despite that, the USD/MXN had resumed its uptrend on speculation that the Bank of Mexico (Banxico) will begin easing its monetary policy. However, the latest inflation report could prevent them from relaxing monetary conditions.

Daily digest market movers: Mexican Peso retreats as investor mood deteriorates

• The latest US inflation report on the producer side affected the markets the most, according to Société Generale. Even though the Consumer Price Index (CPI) in the US was hotter than expected last Thursday, a day later the Producer Price Index (PPI) came lower than estimates, prompting investors to increase odds for a Fed rate cut in March from 78% to 83%. Nevertheless, those odds had eased to 70% at the time of writing.
• Mexican economic data revealed throughout the month suggests the country faces some challenges. Inflation rose from 4.32% to 4.66% YoY in December, exceeding the 4.55% forecast. The same report revealed that underlying inflation is easing toward 5% but remains high, which might deter Banxico officials from easing policy in the first quarter of 2024.
• In addition to that, Industrial Production plunged -1.0% MoM after achieving eight months of expansion, indicating that higher interest rates set by Banxico at 11.25% are beginning to impact the economy.
• In that regard, Auto Production for December slumped from 18.1% to -9.9% YoY.
• Confidence surveys released on January 3 and 8 showed that businesses' confidence remained high at 54.6, bolstered by “nearshoring” prospects. However, consumers have begun to turn pessimistic as they expect inflation and economic deceleration to weigh on their economies.
• The week’s Mexican economic docket will feature Retail Sales for November, expected to remain unchanged at 3.4% YoY, according to the consensus.
• Last Wednesday, the World Bank revised its economic projections for Mexico in 2024. The updated forecast anticipates that Mexico's Gross Domestic Product (GDP) will grow by 2.6%, an increase from the bank’s initial prediction of 1.9%. Analysts at the bank attribute this expected growth to the rise in near-shoring activities, which they believe will positively impact the Mexican economy.
• Although the recent meeting minutes from Banxico (the Central Bank of Mexico) suggest that the central bank might contemplate easing its monetary policy, the inflation report for December could hinder any move toward policy relaxation.
• Analysts at Standard Chartered noted, “We expect the policy rate to be lowered to 9.25% by end-2024, although an official downward revision in the output gap could open the door for more aggressive rate cuts.”
• On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.

Technical analysis: Mexican Peso weakens as USD/MXN climbs toward 16.90

The USD/MXN remains downward biased, but today’s bullish impulse can open the door to challenging the 17.00 figure. A decisive breach of the latter would expose the 50-day Simple Moving Average (SMA) at 17.19, followed by the confluence of the 100 and 200-day SMAs at around 17.38/40.

On the flip side, if sellers drag prices toward last Friday’s low of 16.82, that could open the door for further downside. Once cleared, the next support would be the January 8 low of 16.78, followed by the August 28 cycle low of 16.69, ahead of last year’s low of 16.62.

USD/MXN Price Action – Daily Chart