Mexican Peso rallies to three-day high as US job data exceed forecasts

• Mexican Peso gains against USD, with USD/MXN falling to 16.93 after US jobs data shows higher-than-expected employment growth.
• Banxico's recent minutes highlight ongoing inflation challenges, affirming the need for stable interest rates.
• US Treasury yields rise as market expectations for Fed rate cuts in 2024 adjust to 135 basis points.

The Mexican Peso (MXN) stages a comeback and registers a new three-day high against the US Dollar (USD) after the US Bureau of Labor Statistics (BLS) revealed the economy in the United States (US) added more jobs than expected in December. Even though the USD/MXN initial reaction witnessed the pair hitting a daily high of 17.07, it quickly reversed, tumbling below the 17.00 figure. At the time of writing, the exotic pair is exchanging hands at 16.93, posting losses of 0.45% on the day.

Mexico’s economic docket is absent on Friday, but the release of the latest Bank of Mexico (Banxico) minutes on Thursday suggested the inflationary scenario in the country poses challenges, which is why it sees it necessary to maintain rates at current levels “for a certain time.”

Aside from this, the December US Nonfarm Payrolls report triggered reactions in the financial markets, with traders expecting just 135 basis points (bps) of rate cuts by the US Federal Reserve (Fed) throughout 2024, lower than the 150 bps estimated at the beginning of the week. Therefore, the US 10-year Treasury bond yield climbed above 4% for the third time in the week.

Daily digest market movers: Mexican Peso remains firm extending its gains against the US Dollar

• US Nonfarm Payrolls in December increased by 216K, exceeding forecasts of 170K, though figures from November were downwardly revised from 199K to 173K.
• The Unemployment Rate edged lower from 3.8% to 3.7%, while Average Hourly Earnings YoY rose from 3.9% to 4.1%.
• Most analysts see the December US employment report maintaining a goldilocks scenario, as the Greenback dives after printing a new three-week high at 103.10, as shown by the US Dollar Index (DXY). At the time of writing, the DXY sits at 102.45 almost flat.
• Banxico’s latest meeting minutes suggest the central bank could begin taking into consideration easing monetary policy, but with a cautious approach. Four members of the Governing Council expressed the need to be careful when evaluating or communicating rate cuts. On the other hand, one member said they could begin discussing rate cuts.
• Most of Mexico’s central bank members expressed that inflation’s outlook continues to pose challenges.
• At its December meeting, Banxico kept rates unchanged at 11.25%.
• The Federal Reserve’s latest meeting minutes indicated that most officials believe interest rates are approaching or have reached their peak. However, they noted uncertainty regarding the duration for which the restrictive policy should be sustained. Despite observing some improvements in inflation, they acknowledged that core services prices remain high. It was also mentioned that some policymakers might favor maintaining the current interest rates longer than initially expected.
• On Tuesday, Mexico’s S&P Global Manufacturing PMI for December came out at 52.0, below November’s 52.5, suggesting the economy is slowing down amid Banxico’s tightening cycle.
• On Wednesday, Business Confidence in Mexico improved to 54.6 from 54.0 in November, although it failed to underpin the Mexican Peso, which remained weak during the session.

Technical analysis: Mexican Peso buyers moved in after US jobs report as USD/MXN dives

The USD/MXN resumed its downtrend on Friday and plunged below 17.00. It accelerated its pace to test December’s lowest point seen at 16.86, which, if cleared, could pave the way to challenge last year's cycle low of 16.62.

On the flip side, if sentiment shifts bullish on the US Dollar, the exotic pair could reclaim the 17.00 figure, followed by the 17.05 mark. A breach of the latter will expose the 17.20 figure, followed by the convergence of the 50, 100, and 200-day Simple Moving Averages (SMAs) at the 17.31/42 area.

Also read: Mexican Peso Price Annual Forecast: Which factor would impact most in 2024, economics or politics?

USD/MXN Price Action - Daily Chart