Mexican Peso trips down on a firm US Dollar

• Mexican Peso starts the session lower as the US Dollar Index (DXY) remains steady around 103.24.
• Despite Wall Street gains, USD/MXN fails to rally sharply due to improved risk appetite and lower US Treasury bond yields.
• Mexico’s economic docket is eyed by traders, expecting the release of Economic Activity and inflation data.

The Mexican Peso begins the Monday session on a lower note against the US Dollar (USD) due to the Greenback capping its earlier losses as shown by the US Dollar Index (DXY), which is virtually unchanged near 103.24. Alongside that, an improvement in risk appetite and falling US Treasury bond yields have deterred the USD/MXN from gaining ground to higher levels with the pair trading at 17.13, up 0.35%.

Wall Street prints solid gains, which would usually bolster the Mexican currency. Nevertheless, the lack of economic data in Mexico’s docket on Monday and Tuesday leaves traders leaning on data from the United States. Mexico’s calendar will gain traction on Wednesday with the release of the Economic Activity report, along with January’s mid-month inflation data.

In the meantime, Federal Reserve (Fed) officials are absent as they enter their blackout period ahead of the January 30-31 monetary policy meeting.

Daily digest market movers: Mexican Peso on the defensive with traders awaiting further data

• 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 argued, "If [policy] is loosened, inflationary expectations will deteriorate.”
• Mexico’s latest economic data points to the economy slowing down as Retail Sales missed the forecast and trailed October’s data. At the same time, the economy is expected to grow by 2.6%, below forecasts of 3%.
• On the US front, last week’s economic data paints a soft-landing outlook. Even though housing data was mixed, American household sentiment improvement and lower inflation expectations underpinned the USD/MXN.
• 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.
• Traders trimmed their bets for a dovish Federal Reserve in 2024. They stand at 142 basis points (bps) of cuts from 175 bps last week.
• The strongest catalyst last week was 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 Waller 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 it may consider easing its monetary policy, the inflation report for December poses a potential obstacle to any such policy relaxation.
• Standard Chartered analysts estimate the Bank of Mexico (Banxico) will lower rates to 9.25% in 2024.
• 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 remains soft as USD/MXN meanders around 50-day SMA

The USD/MXN daily chart shows the pair is strengthening, testing the 50-day Simple Moving Average (SMA) at 17.15, ahead of a key resistance level at the 200-day SMA at 17.36. Further upside is seen once those levels are taken, followed by the 100-day SMA at 17.42 and 17.50. A breach of the latter will expose the May 23 high of 17.99.

On the flip side, if sellers cap the exotic pair from reclaiming the 50-day SMA, that would expose the pair to further losses. The first support would be the January 22 low of 17.05, the figure at 17.00, and the January 12 cycle low seen at 16.82.

USD/MXN Price Action – Daily Chart