Mexican Peso down for third day against US Dollar on risk aversion and strong US data

• Mexican Peso down 0.38% vs. US Dollar, extending loss to three days due to global risk aversion.
• USD/MXN tests but doesn't break 200-day SMA at 17.37 as market anticipates Mexico's November Retail Sales.
• Strong US economic data and Fed's slow rate cut stance drive USD to five-week high, affecting Peso.

The Mexican Peso extends its losses to three consecutive days against the US Dollar as risk aversion weighs on risk-perceived currencies like the Peso, which tested stir resistance at the 200-day Simple Moving Average (SMA) near 17.37. Still, the exotic pair has trimmed some of its losses, but it remains down on the day by 0.38% as the USD/MXN exchanges hands at 17.28.

Mexico’s economic docket remains absent, with traders looking for the release of November’s Retail Sales, expected to dip to 0.5% MoM and grow 3.2% on a yearly basis.

Across the border, solid economic data from the United States (US) and Federal Reserve (Fed) speakers pushing back against investors' speculations on rate cuts bolstered the Greenback, which, as shown by the US Dollar Index (DXY), gained 0.21% and hit a five-week high of 103.69.

Daily digest market movers: Mexican Peso falls as Fed rate cut bets are trimmed

• US Retail Sales in December smashed estimates, according to data revealed by the US Department of Commerce. Sales on a monthly basis rose by 0.6%, above forecasts of 0.4% and November’s figure of 0.3%. Yearly data jumped 5.6%, surpassing the previous month’s 4%.
• Industrial Production in December expanded above the forecast of 0%, coming in at 0.1% MoM and avoiding back-to-back prints suggesting the economy is stagnating. On a 12-month basis from December, the reading increased by 1%, well above November’s -0.4% drop.
• The USD/MXN advance on Wednesday is sponsored by the jump in US Treasury bond yields, reflecting that traders might have gone too far, pricing more than 150 basis points of rate cuts by the Fed for 2024. The latest comments from Fed Governor Christopher Waller saying there’s “no reason to move as quickly or cut as rapidly as in the past,” kept investors in check despite supporting rate cuts if inflation indeed gets lowered.
• The lack of data in Mexico keeps traders leaning on the latest inflation figures, which edged higher than expected in headline inflation, but core data suggests the Bank of Mexico (Banxico) has done a good job, curbing elevated prices after hiking rates toward 11.25%.
• Although December’s 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 slumps sharply as USD/MXN challenges the 200-day SMA

The USD/MXN is neutrally biased, though the earlier test of the 200-day SMA at 17.37 put sellers in danger of losing that level. Once cleared, it could open the door to challenge higher prices. Up next is the 100-day SMA at 17.41, followed by the December 5 high at 17.56, before testing the May 23 high of 17.99.

On the contrary, sellers need to pull prices below 17.00, which could exacerbate a retest of the January 12 low of 16.82, followed by the January 8 low of 16.78. Once those levels are hurdled, the next demand level would be the August 28 cycle low of 16.69, ahead of last year’s low of 16.62.

USD/MXN Price Action – Daily Chart