Mexican Peso advances modestly on mixed Retail Sales following solid US Consumer Sentiment

• Mexican Peso appreciates more than 0.15%, overcoming weak Retail Sales data and sluggish economic growth projections.
• Former Banxico Deputy Governor Elizondo suggests a continued tight monetary policy stance in Mexico.
• Improved US Consumer Sentiment and revised inflation expectations likely capped the Peso’s advance.

The Mexican Peso (MXN) registered solid gains against the US Dollar (USD), but it remains set to register losses of more than 1.45% in the week after Retail Sales in the country missed estimates, growing less than expected. In addition, the National Statistics Agency (INEGI) revealed that Mexico’s economy would likely grow below the 3% expected by analysts in December in a preliminary reading by the Timely Indicator of Economic Activity (IOAE). Nevertheless, the USD/MXN exchanges hands at 17.11, down by 0.29%, favoring the emerging market currency.

In the meantime, former Bank of Mexico (Banxico) Deputy Governor Everardo Elizondo commented that it’s too soon to relax monetary policy in Mexico, adding, “There are enough reasons to remain worried.” Elizondo added, "if [policy] is loosened, inflationary expectations will deteriorate.”

Across the border, Consumer Sentiment improved, according to a University of Michigan poll, and households downwardly revised inflation expectations for one and five-year periods.

Daily digest market movers: Mexican Peso regains control amid mixed Mexico data

• Mexico’s Retail Sales rose by a minimum of 0.1% MoM, below forecasts of 0.5% and trailing October’s 0.7%. Annually the indicator slowed from 3.4% to 2.7%, lower than estimates of 3.2%.
• Mexico’s INEGI revealed that the Timely Indicator of Economic Activity (IOAE) anticipates economic growth of 2.6% in December.
• The  preliminary reading from the Michigan Consumer Sentiment Index reached its highest level since the summer of 2021 and came in at 78.8, exceeding forecasts of 70 and the previous reading of 69.7. Joanne Hsu, the Director of Surveys of Consumer, said, “Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations.”
• US households’ inflation expectations for one year dropped from 3.1% to 2.9% and from 2.9% to 2.8% for five years.
• Existing Home Sales fell in December as supply showed signs of improvement, according to the National Association of Realtors. Sales rose by 3.78 million, below estimates of  3.82 million and trailed November’s 0.8% increase.
• The US economy remains robust, as most data suggests the economy continues to expand at a steady pace. The Atlanta GDPNow model suggests last year’s Q4 would likely expand by 2.4%, spurred by strong retail sales, firm industrial production, a tight labor market and consumer sentiment improvement.
• Following the release of the Michigan survey of consumer sentiment, investors continued to trim bets on rate cuts by the Federal Reserve. At the beginning of the week, the swaps market priced in 175 basis points of rate cuts in 2024. But following solid US data this week, those were trimmed to 150 bps.
• The strongest catalyst in the week has been Federal Reserve Governor Christopher Waller’s speech: “No reason to move as quickly or cut as rapidly as in the past.” This kept investors in check despite supporting rate cuts if inflation indeed gets lowered.
• Mexico witnessed a jump 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%.
• Despite indications from the December meeting minutes of Banxico (the Central Bank of Mexico) that the bank may consider easing its monetary policy, the inflation report for December poses a potential obstacle to any such 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 stays firm as USD/MXN meanders around 100-day SMA

The USD/MXN remained trading sideways on Friday, though with a tilt to the upside as buyers reclaimed the 17.00 psychological barrier. If they push the exchange rate toward the 200-day Simple Moving Average (SMA) at 17.36, that could pave the way to test the 100-day SMA at 17.42. That level comes ahead of the December 5 high at 17.56 and the May 23 high of 17.99.

On the other hand, the ongoing pullback below 17.20 could pave the way for a drop toward the 17.00 figure. Once cleared, further downside is expected at the January 8 low of 16.78. Once surpassed, the next support 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