Mexican Peso climbs as Banxico hints at readiness to intervene

• Mexican Peso counterattacks, snapping two days of losses.
• Banxico Governor Victoria Rodriguez Ceja assures intervention if Peso exhibits “atypical behavior or extreme volatility.”
• Greenback weakens against Peso despite Fed's unchanged rates and revised projections with US economic data showing mixed signals.

The Mexican Peso recovered some ground on Thursday and appreciated 0.93% following a verbal intervention by the Bank of Mexico (Banxico). Governor Victoria Rodriguez Ceja commented that the Bank is ready to step in if the Peso shows “atypical behavior or extreme volatility.” The USD/MXN trades at 18.56, around two-day lows.

Mexico’s economic docket remains absent for the rest of the week, with traders awaiting the release of Aggregate Demand, Private Spending, and Retail Sales data next week. However, the USD/MXN exchange rate continues to be driven by political uncertainty about the changes to the Mexican Constitution that threaten the state of law.

In the meantime, on Wednesday, Banxico’s Governor Victoria Rodriguez Ceja commented that the Mexican central bank remains attentive to the USD/MXN exchange rate and insisted that policymakers are not trying to defend a specific level.

Aside from this, the Greenback is on the back foot against the Mexican currency even though the US Federal Reserve (Fed) held rates unchanged and adjusted their projections for future monetary policy. Fed Chair Jerome Powell and the central bank’s governors estimate one interest rate cut in 2024 instead of the three projected by the dot plot since December 2023.

Meanwhile, US economic data showed that prices paid by producers in May were virtually unchanged compared to April, while the number of Americans filing for unemployment benefits exceeded estimates.

Daily digest market movers: Mexican Peso on defensive amidst political uncertainty

• In February 2024, AMLO put forward several proposals to the Mexican Congress. These include a Supreme Court reform that suggests electing Supreme Court ministers through popular vote; an electoral reform aimed at electing electoral commission councilors by popular vote and reducing multi-member representation; and a reform of autonomous bodies that proposes dissolving the transparency body.
• Mexican Peso depreciation could weigh on the Bank of Mexico's (Banxico) decision to ease policy on June 27 despite last month’s dip in core prices. Therefore, keeping interest rates higher could prompt deceleration in the economy and increase the odds of a possible recession.
• Morgan Stanley noted that if Mexico’s upcoming government and Congress adopted an unorthodox agenda, it would undermine Mexican institutions and be bearish for the Mexican Peso, which could weaken to 19.20.
• The US Department of Labor revealed that the Producer Price Index (PPI) in May was 2.2% YoY, below estimates of 2.5%, and a tenth below April’s 2.3%. Core PPI for the same month expanded 2.3% YoY, beneath the consensus and the previous reading of 2.4%.
• The latest US inflation report increased the odds for a Fed rate cut in September, according to the CME FedWatch Tool, from 46.7% to 60.5%.
• December’s 2024 fed funds futures contract hints that investors expect 38 basis points of rate cuts by the Fed through the end of the year.

Technical analysis: Mexican Peso advances as USD/MXN slides below 18.60

The USD/MXN uptrend remains intact despite retreating toward the 18.50s region, which could be seen as buyers taking a respite as the Relative Strength Index (RSI) turned overbought. Despite that, momentum favors further upside after the exotic pair cleared strong resistance levels, opening the door for higher spot prices.

The USD/MXN's next resistance would be the year-to-date high of 18.99, followed by the March 20, 2023, high of 19.23. A breach of the latter will sponsor an uptick to 19.50, ahead of the psychological 20.00 mark.

On the other hand, sellers must push the USD/MXN back below the April 19 high of 18.15 if they want to keep the pair within the 18.00-18.15 trading range.