Mexican Peso falls over 1% as inflation reaccelerates amid weak USD

• Mexican Peso depreciates over 1% against USD, trades above 18.30.
• INEGI’s mid-month inflation data reveals mixed results, halting disinflation and raising concerns.
• Political uncertainty grows as Mexican Congress prepares to discuss judicial reforms impacts the Mexican currency.

The Mexican Peso depreciated over 1% against the Greenback after the National Statistics Agency (INEGI) revealed mixed mid-month Inflation data. Market participants, who remain risk averse, overlooked this, while the carry trade that favored the emerging market currency began to unwind, according to ING. The USD/MXN trades at 18.32 after bouncing off daily lows of 18.13.

 On Wednesday, INEGI revealed that headline inflation rose above estimates while underlying prices ticked lower on monthly figures but not annually. The disinflation process seems to be halting due to the reacceleration of inflation that began in March and rose above the 5% threshold, hitting its highest level since May 2023.

Meanwhile, political woes hurt the Peso after newswires revealed that the Mexican Congress will begin to discuss President Andres Manuel Lopez Obrador's reform of the judiciary system on August 1. This is to prepare the bill for approval once the new Congress begins its three-year period on September 1.

ING mentioned that the low volatility environment I not favoring any rotation back to the carry trade. They said, “On the contrary, markets appear to be unwinding positions in some selected high yielding currencies like MXN and ZAR, while the funding JPY continues to perform very well.”

In the meantime, USD/MXN traders are also eyeing the release of crucial US economic data. On Thursday, the docket will feature Gross Domestic Product (GDP) data, followed by the release of the Federal Reserve’s (Fed) preferred gauge for inflation, the Core Personal Consumption Expenditure (PCE) Price Index.

Daily digest market movers: Mexican Peso plummets amid weaker US Dollar

• Mid-month Inflation for July rose by 0.71% MoM, which was higher than the 0.39% expected and crushed the previous reading of 0.21%. On a yearly basis, prices rose by 5.61% above forecasts of 5.27% and crushed the previous report of 4.78%.
• Mid-month core Inflation expanded by 0.18% MoM, a tenth higher than the previous report, lower than expected, and in the twelve months to mid-July, it dropped from 4.17% to 4.02% as foreseen.
• Citi Research Expectations survey shows that analysts estimate inflation to end at 4.30% YoY, up from 4.20%, while underlying inflation is foreseen to finish 2024 at 4.0%.
• Regarding growth, Mexico’s economy is expected to grow 1.9%, down from 2.0% in the last poll.
• The US Dollar Index (DXY), which tracks the buck’s value against the other six currencies, drops 0.24% to 104.22.
• US S&P Global PMIs expanded as expected in the Services and Composite sectors, but the Manufacturing figure contracted for the first time since December 2023
• The CME FedWatch Tools show that the chances of a quarter-percentage-rate cut to the federal funds rate in September are 100%.
• Data by the Chicago Board of Trade (CBOT) shows that traders are pricing in 53 basis points (bps) of easing towards the end of the year, as shown by the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso drops as USD/MXN sticks above 18.00

The USD/MXN extends its gains above the psychological 18.00 figure and is set to extend its gains if it reclaims key resistance levels. Buyers are gathering momentum, as shown by the Relative Strength Index (RSI), aiming upwards after the exotic pair’s pullback from 18.59 to 17.58

If USD/MXN clears 18.50, the next resistance would be the year-to-date (YTD) high at 18.99.

Conversely, if USD/MXN retreated beneath 18.00, that would pave the way to challenge the 50-day Simple Moving Average (SMA) at 17.74, the first support level. The next support would be the latest cycle low of 17.58; the July 12 high turned support. A breach of the latter will expose the January 23 peak at 17.38.