Mexican Peso drops amid pre-Fed risk aversion, soft US employment data

• Mexican Peso depreciates as broader market caution remains before Fed decision.
• US employment data and a low Employment Cost Index shows the labor market is cooling.
• USD/MXN traders eye FOMC, which is expected to adopt a neutral interest rate stance.

The Mexican Peso (MXN) weakens against the US Dollar (USD) on Wednesday and posts losses of more than 0.10% as risk aversion drives the financial markets ahead of the US Federal Reserve’s (Fed) monetary policy decision. Mexico’s economic docket is empty. In the United States, employment data was soft, and the Employment Cost Index (ECI) sought by Fed officials as a measure of inflation in wages dipped below estimates. The USD/MXN trades at 17.16 after hitting a daily low of 17.09.

Wall Street trades with losses as investors prepare for the Fed. The US central bank is expected to keep rates at the 5.25%-5.50% range with the tone of the statement remaining neutral. Following that, Fed Chairman Jerome Powell's press conference is expected to strike a more balanced approach, recalling last December’s ultra-dovish conference.

Daily digest market movers: Mexican Peso virtually unchanged ahead of Fed meeting

• The Employment Cost Index (ECI), a key indicator of wage inflation monitored by Federal Reserve officials, fell from 1.1%QoQ to 0.9% in the fourth quarter, indicating a cooling in the labor market.
• The ADP Employment Change report for the United States showed weaker performance in January, with private hiring rising only 107K jobs, falling short of December’s 158K and the predicted 145K. The report mentioned, “Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay.” As wages had improved in the last semester, “the economy looks like it’s headed toward a soft landing.”
• Mexico’s economy grew below forecasts in the last quarter of 2023. GDP expanded 0.1% QoQ, trailing Q3 1.1% growth and forecasts of 0.4%.
• Given that the Mexican economy remains solid, according to the data revealed in January, the Bank of Mexico (Banxico) could delay easing monetary policy as conditions remain hotter than expected.
• However, if Banxico’s officials remain determined to begin its easing cycle in Q1 of 2024, that could depreciate the emerging market currency due to the reduction of interest rate differentials. That could also underpin the USD/MXN pair toward the psychological 18.00 figure.
• The US labor market remains solid as the latest JOLTS report revealed vacancies exceeded estimates, which could prevent Fed officials from easing policy in the near term.
• Consumer Confidence was higher than the previous month’s data, courtesy of slower inflation, expectations for lower interest rates and “generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board.
• Additional factors that might depreciate the Mexican currency are geopolitical risks and risk aversion.
• Across the border, the US economy remains resilient as GDP in Q4 of last year crushed forecasts despite easing from Q3’s 4.9%. That could force Fed officials to refrain from easing policy, but the latest inflation data suggests they’re close to getting inflation to its 2% target.
• Nevertheless, mixed readings in other data suggest that risks have become more balanced. That is reflected by investors speculating that the Fed will cut rates by 139 basis points during 2024, according to the Chicago Board of Trade (CBOT) data.

Technical Analysis: Mexican Peso steady as USD/MXN looms around 17.15

The USD/MXN trades range-bound, slightly tilted to the upside, capped by key Simple Moving Averages (SMAs), with the 50-day SMA at 17.13 and the 200-day SMA at 17.33. Although it appears closer to the 50-day SMA, market sentiment could lift the exchange rate to the 200-day SMA at 17.33, which, once cleared, could open the door for higher prices. Next resistance would be the 100-day SMA at 17.41, followed by the December 9 high at 17.56. Last of all sits the May 23 high from last year at 17.99.

On the flip side, if the USD/MXN exchange rate drops below the 50-day SMA at 17.13, that will expose the January 22 low at 17.05, followed by the 17.00 psychological level.

USD/MXN Price Action – Daily Chart