Mexican Peso advances despite posting disappointing Retail Sales

• Mexican Peso rises 0.26% against US Dollar and dives below 16.60.
• Weak March Retail Sales data from INEGI ahead of Q1 GDP release and Banxico minutes.
• Banxico Deputy Governor Espinosa's hawkish stance contrasts with US Fed's cautious optimism on disinflation.

The Mexican Peso posted solid gains against the US Dollar in early Monday trading during the North American session. Although Mexican Retail Sales data plunged, the Mexican currency edged up on Deputy Governor Irene Espinosa's hawkish comments last Friday. The USD/MXN trades at 16.56, down 0.26%.

Mexico’s economic docket should be busier than last week. On Monday, the Instituto Nacional de Estadística Geografía e Informática (INEGI) revealed that Retail Sales in March missed the mark in monthly and yearly figures.

The data comes ahead of the release of Gross Domestic Product (GDP) figures for the first quarter of 2024 on May 23. These figures are expected to show that the Mexican economy is slowing amid higher borrowing costs of 11.00% set by the Bank of Mexico (Banxico) on fears of higher inflation and a depreciation of the Peso.

Later that day, Banxico would release the minutes of its latest monetary policy meeting, followed on Friday by the announcement of the Balance of Trade and the Current Account.

Last Friday, Banxico’s Deputy Governor Irene Espinosa, the dissenter of the latest meeting, made hawkish comments stating that March’s rate cut was premature and that it would hinder inflation convergence to the bank’s goal.

Across the border, the Vice-Chair of the Federal Reserve, Philipp Jefferson, said that the policy rate is restrictive, adding that April’s reading is encouraging. However, it’s too early to tell if the disinflationary process will last.

Daily digest market movers: Mexican Peso soars on Espinosa’s hawkish stance

• Retail Sales in March plunged -0.2% MoM, below February’s 0.5% increase. On a yearly basis, sales plummeted -1.7%, missed estimates of 0%, and trailed the previous month's 3% growth.
• Diverging views surface in Banxico. Governor Victoria Rodriguez Ceja said last Monday that the bank would discuss lowering rates in the upcoming meeting on June 29. Conversely, Deputy Governor Espinosa commented that lowering rates in March might have delayed inflation convergence toward the central bank’s target by two quarters.
• According to Bloomberg, leveraged funds increased its net long Peso positions by 3,780 contracts between May 7 and May 14 via CFTC data. Institutional asset managers, which hold the biggest bullish position in the peso with 146,975 contracts, also added to positive momentum with 2,558 long peso contracts in the same week. That has propelled the Mexican Peso to be the best-performing currency in the world so far.
• Atlanta’ Fed President Raphael Bostic commented that interest rates are likely to remain higher than last decade, adding that Fed is open to all possibilities amid many economic scenarios.
• Data from the Chicago Board of Trade shows investors are expecting 33 basis points (bps) of the Fed’s easing toward the end of the year, down from Friday’s 35 bps.

Technical analysis: Mexican Peso extends its gains as USD/MXN falls below 16.60

The Mexican Peso continues to rally sharply as the USD/MXN downtrend extends, likely to test the psychological 16.50 figure. Momentum, as depicted by the Relative Strength Index (RSI), favors sellers, yet they seem to take a breather as the downward move stalled.

Once the USD/MXN falls below 16.50, the next stop would be the current year-to-date low of 16.25.

Conversely, if buyers reclaim the 50-day SMA at 16.76, it could exacerbate a rally toward the 100-day SMA at 16.91. Once cleared, the next supply zone would be the 17.00 psychological level. In that event, the next stop would be the 200-day SMA at 17.17.