Mexican Peso hangs onto modest gains as AMLO makes way for Sheinbaum

• The Mexican Peso closed Monday slightly higher in its key pairs. 
• President-elect Claudia Sheinbaum takes over from outgoing President Andres Manuel Lopez Obrador on Tuesday. 
• USD/MXN pauses in its uptrend, but the bias remains bullish. 

The Mexican Peso (MXN) fluctuates between modest gains and losses on Tuesday after closing the previous day marginally higher in its major trading pairs – USD/MXN, EUR/MXN and GBP/MXN. The lack of volatility is probably due to the fact that October 1 is a public holiday in Mexico, and many financial market participants are absent from their desks for both days at the start of the week. 

The news flow out of Mexico is mainly concerned with the outgoing President Andres Manuel Lopez Obrador’s (AMLO) handover of power to his successor, President-elect Claudia Sheinbaum, who officially takes office on October 1. Global investors will probably watch her inauguration speech with interest in an attempt to discern the broad policy trajectory of her administration. On Monday, news of her cabinet reshuffle indicated she is keeping some of AMLO’s old personnel alongside some new hires. 

However, Sheinbaum has always made it clear she supports most of AMLO’s contentious constitutional reforms, which rocked the Peso after her election win in June. 

Mexican Peso closed marginally higher as currency peers weaken

The Mexican Peso strengthened slightly versus the Euro (EUR) on Monday after German inflation data came out lower than estimated in September. This raised the possibility that Eurozone-wide inflation may also be falling, which, in turn, could pressure the European Central Bank (ECB) to accelerate cuts to interest rates. Lower interest rates tend to lead to capital outflows and a weaker Euro. The situation will be clarified when the official Eurozone Harmonized Index of Consumer Prices (HICP) inflation data is released on Tuesday.  

The single currency further weakened after ECB President Christine Lagarde hinted that inflation was falling back to the central bank’s 2.0% target, as expected, in her speech to the European Parliament's Committee on Economic and Monetary Affairs on Monday. "The latest developments strengthen our confidence that inflation will return to target in a timely manner," she said, suggesting a greater chance the ECB would move to ease policy in its next meeting.

The Mexican Peso closed Monday marginally higher against the US Dollar (USD) despite a relatively hawkish speech from the Federal Reserve (Fed) Chairman Jerome Powell. The Fed chair struck a cautious tone, advocating a data-driven, meeting-by-meeting approach to monetary policy. The market-based probability of the Fed cutting interest rates by 0.50% again in November fell to around the mid-30% mark from being over 60% at one point last week, according to the CME FedWatch tool. On the economic data front, Tuesday sees the release of September’s US ISM Manufacturing Purchasing Managers Index (PMI) data and August’s JOLTS Job Openings. 

With GBP/MXN, it was a similar story as the Peso closed a few pips higher on Monday. The Pound Sterling (GBP) was sold after the UK Gross Domestic Product (GDP) growth data’s final reading for Q2 revealed a downward revision to 0.7% YoY from its previous 0.9% estimate. That said, other UK data showed Business Investment growing and UK borrowing data revealed consumers continuing to access credit.

Technical Analysis: USD/MXN pauses within uptrend 

USD/MXN pauses and consolidates during its steady climb within a rising channel. The pair is in a short, medium and long-term bullish trend, and according to technical analysis theory, it is more likely to resume its bullish momentum eventually. 

USD/MXN Daily Chart 

Friday’s close above 19.68 (September 25 high) provided more bullish certainty of the pair’s near-term upside bias towards a target at 20.15, the high of the year reached in early September.

A further break above 19.76 (the September 27 high) would create a higher high and provide yet more proof of an extension of the uptrend.