Mexican Peso slumps on risk aversion, strong US Dollar

• Mexican Peso plummets more than 1% as USD/MXN trades above 17.90.
• Fitch reaffirms Mexico's BBB- rating, highlighting judicial reform and fiscal deficit concerns.
• US unemployment claims rise, boosting the US Dollar Index above 104.00, gaining 0.25%.

The Mexican Peso begins Thursday’s session on the backfoot against the Greenback as investors turn risk-averse, while the Greenback remains bid and trims some of Wednesday’s losses. The USD/MXN trades at 17.92, 1.30 % above its opening price.

Mexico’s economic docket remains absent, leaving traders adrift to market mood and US Dollar dynamics. Meanwhile, Fitch ratings reaffirmed Mexico’s BBB- qualification with a stable outlook.

In further comments, Fitch revealed that the proposed judicial reform would negatively affect Mexico’s institutional profile, but it's too early to gauge the impact. The credit rating agency stated there’s uncertainty in the upcoming administration to narrow the fiscal deficit, expects a slight economic slowdown in 2025, and added that trade tensions with the US could leave Mexico vulnerable.

Fitch reviews came after the International Monetary Fund (IMF) adjusted Mexico’s Gross Domestic Product (GDP) expectations for 2024 from 2.4% to 2.2% due to the country’s economic slowdown and the US economic downturn.

Across the border, the US Bureau of Labor Statistics (BLS) revealed that US unemployment claims rose above estimates and last week’s reading, indicating some slack in the labor market. Continuing claims also increased and hit its highest level since November 2021.

The Greenback rose after the data, with the US Dollar Index (DXY), which tracks the buck’s value against the other six currencies, climbing back above 104.00, gaining 0.25%.

Daily digest market movers: Mexican Peso trips down on US Dollar strength

• Mexico’s economic docket will be absent during the week, resuming on July 22, when the National Statistics Agency (INEGI) reveals growth figures for the month of May. Nevertheless, Bank of Mexico (Banxico) policymakers and political developments could rock the boat.
• US Initial Jobless Claims revealed by the BLS showed that the number of Americans filing for unemployment benefits in the week ending July 13 rose above estimates of 230K, coming at 243K, and exceeded the previous week's reading of 223K.
• Bloomberg’s interview of Donald Trump spooked investors as the former US President commented that he favors tax reductions, lower interest rates, and tariffs, including a 60% to 100% increase in China’s products and a 10% in the general rate in other countries.
• The CME FedWatch Tools show the chances for a quarter of a percentage rate cut to the federal funds rate in September are at 98%.
• June consumer inflation figures were lower than expected in the United States, increasing the chances that the Federal Reserve would lower borrowing costs in 2024 by at least 52 basis points, according to the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso depreciates further as  USD/MXN rallies above 17.90

On Wednesday, I wrote, "The USD/MXN has bottomed at around the 50-day Simple Moving Average (SMA) after the pair tumbled more than 2.50% as the Mexican currency appreciated. However, buyers had stepped in, forming a floor at around 17.58-17.60.”

As of writing, the exotic pair is rallying sharply above the 17.90 figure after bouncing around the above-mentioned area, putting into play a test of the psychological 18.00 mark.

Momentum changed and favored buyers as the Relative Strength Index (RSI) aimed upward and pierced above its neutral line, hinting that bulls are stepping in.

If USD/MXN extends its gains above the psychological 18.00 figure, that will expose key resistance levels. Once breached, the next stop would be the July 5 high at 18.19, followed by the June 28 high of 18.59, allowing buyers to aim for the YTD high at 18.99.

On further weakness, if USD/MXN clears the 50-day SMA at 17.63, that would pave the way to challenge the December 5 high at 17.56, followed by the 200-day SMA at 17.27. Further losses would test the 100-day SMA at 17.21.