Mexican Peso retreats on thin trading after strong US PPI

• Mexican Peso depreciates and reverses weekly gains amid mixed US economic reports.
• US Producer Price Index climbs to highest level since June, fueling discussions on inflation trends.
• The Fed is expected to cut interest rates by 25 basis points  next week.

The Mexican Peso weakens after posting back-to-back bullish days, dropping over 0.44% against the Greenback as mixed US economic data and a holiday in Mexico keep trading conditions thin. The USD/MXN trades at 20.20 after bouncing off around weekly lows of 20.09.

US factory gate inflation increased in November, according to the US Bureau of Labor Statistics. The Producer Price Index (PPI) rose to its highest level since June, according to monthly figures. At the same time, the Department of Labor reported that Americans filing for unemployment benefits had increased.

Even though inflation reaccelerated, market players seem confident that the Federal Reserve (Fed) will cut interest rates at next week’s meeting. Odds that the Fed will lower rates by 25 basis points are now at 99%, according to the fed fund rate futures market.

Mexico’s economic docket revealed that Industrial Production plummeted in October, in monthly and annual figures.

On Wednesday, the Bank of Mexico (Banxico) remained confident in the country’s financial system despite the “notable weakness” experienced by Latin America’s second-largest economy. In the biannual report, Banxico recognized the robust institutions for the system’s stability, adding that capital and liquidity levels are above regulation minimums.

Aside from this, Banxico is expected to continue its easing cycle following Monday’s inflation report. November’s Consumer Price Index (CPI) opened the door for further easing. Analysts at JP Morgan noted that Banxico might lower rates by 50 basis points (bps), as inflation data shows that prices are edging lower faster than expected.

The economic docket for the remaining week is empty in Mexico. In the US, it will feature Import and Export Prices.

Daily digest market movers: Mexican Peso on the backfoot after hot US PPI

• November's PPI showed headline inflation rising to 3% YoY, up from 2.4% in October and above the expected 2.6%. Core PPI also climbed to 3.4% YoY, surpassing forecasts of 3.2% and October's 3.1%.
• US Initial Jobless Claims for the week ending December 7 spiked to a two-month high of 242K, well above the projected 220K.
• Mexico’s Industrial Production contracted by -1.2% MoM in October, down from a 0.6% expansion in September and well beneath estimates of -0.2%. On an annual basis, production dropped -2.2% YoY from -0.3%, missing forecasts of -0.6%.
• The swaps market suggests Banxico will cut interest rates by 25 basis points at the December 19 meeting.
• The US yield curve for 2025 suggests that speculators estimate 100 basis points of easing toward the end of the year.
• Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 24 bps of Fed easing by the end of 2024.
• Banxico’s Governor, Victoria Rodriguez Ceja, remains dovish. In her last interview with Reuters, she said that given the progress of disinflation, the central bank could continue lowering borrowing costs.

USD/MXN technical outlook: Mexican Peso stumbles as pair jumps to 20.20

The USD/MXN bounces off weekly lows as the exotic pair consolidated below the 20.10 area for the last four days. However, demand for US Dollar weighed on the Peso and lifted the pair back to the 20.20 mark.

Momentum remains tilted to the downside as depicted by the Relative Strength Index (RSI). But sellers must push the USD/MXN below 20.00, which will clear the path for lower exchange rates.

In that outcome, the USD/MXN next support would be the 100-day Simple Moving Average (SMA) at 19.68, ahead of 19.50. On further weakness, the pair could test the October 4 swing low of 19.10, ahead of 19.00.

Conversely, if buyers keep USD/MXN above 20.20, the next resistance would be 20.50. A breach of the latter will expose the December 2 daily high of 20.59, followed by the year-to-date (YTD) peak of 20.82, followed by the 21.00 mark.