Mexican Peso slumps amid weak Retail Sales ahead of GDP data

• Mexican Peso weakens after INEGI reports sharp declines in June Retail Sales with inflation concerns looming.
• US Dollar strengthens following downward revision of Nonfarm Payrolls by 800K.
• Fitch warns of rising debt risks for Mexico’s next administration with potential impacts on sovereign rating amid judicial reform controversy.

The Mexican Peso depreciated over 1.20% against the US Dollar in early trading on Wednesday as traders digested Mexico’s dismal Retail Sales report and awaited the release of a revision of US employment figures. The USD/MXN trades at 19.21 after bouncing off a daily low of 18.92.

Wall Street traded in the green, portraying optimism among investors. The Greenback advanced as the Bureau of Labor Statistics (BLS) revised the Nonfarm Payrolls (NFP) figures downward by 800K.

Meanwhile, on Tuesday, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed that Retail Sales in June plunged in monthly and annual figures. In addition to this data, August’s mid-month inflation data is expected to tick up in core figures, while the headline is foreseen edging lower.

In the meantime, Fitch’s rating said that Mexico’s upcoming administration will face a growing debt above 51% of the Gross Domestic Product (GDP), which could affect the country’s sovereign rating.

The agency noted, “The fiscal strategy and governance reforms of the Sheinbaum government will be key factors for Mexico's rating.”

Fitch analysts added that judiciary reform “would negatively affect Mexico’s overall institutional profile, but the severity of their impact could become clearer once approved and implemented.”

Meanwhile, unions representing Mexico’s judicial workers launched an indefinite nationwide strike last Monday against President Andres Manuel Lopez Obrador's proposed judiciary reform.

According to Reuters, “The unions criticized the reform push in a statement as rushed and a danger to the "only counterweight" to the ruling Morena party's dominance of both the presidency and Congress.”

Juana Fuentes, the national director of Mexico’s Association of Federal Judges and Magistrates, which organized the strike vote on Tuesday, said, “If this bill passes, we will be creating a regime of absolute power concentrated in one single person.”

In addition, USD/MXN traders will be eyeing the release of the latest Federal Reserve (Fed) monetary policy meeting.

Daily digest market movers: Mexican Peso weakens as data hints at economic slowdown

• Mexico’s Retail Sales for June dived -3.9% YoY, below expectations for a contraction of -1.7%. Every month, sales plunged -0.5%, below estimates of a 0.2% increase.
• Mid-month inflation in August is expected to drop from 5.61% YoY to 5.31%, while core figures are estimated to rise from 4.02% to 4.06%.
• Meanwhile, Mexico’s economy is expected to grow by 2.2% YoY, according to the Gross Domestic Product (GDP) final figures for the second quarter, which is against preliminary readings of 1.65%.
• The USD/MXN is also driven by interest rate differentials between the two countries. Although the spread has narrowed as the Bank of Mexico (Banxico) lowered rates at the August meeting, traders estimate the Fed will cut rates by at least 98 basis points, according to the CBOT fed funds rate December 2024 futures contract.

Technical analysis: Mexican Peso extends losses as USD/MXN climbs above 19.20

The USD/MXN uptrend remains intact and might continue, but stir resistance lies ahead. Momentum favors buyers with the Relative Strength Index (RSI) remaining bullish.

If the exotic pair extends its gains, the first resistance it would face would be 19.50. A breach of the latter will expose the psychological 20.00 figure, ahead of the year-to-date (YTD) high of 20.22.

On the flip side, on USD/MXN, there is further weakness. Peso’s buyers could drive the pair beneath the psychological 19.00 figure. Once cleared, the next stop would be the latest cycle low of 18.59, hit on August 19.