Mexican Peso retreats on risk-off mood after Beijing puts brake on stimulus

• The Mexican Peso edges lower as markets turn risk-off following a disappointing stimulus announcement in China. 
• The Peso may see losses curbed, however, by increasing investor confidence in the new Sheinbaum administration. 
• USD/MXN breaks below the key 50-day SMA and tests the bottom of a major rising channel. 

The Mexican Peso (MXN) pulls back in its key pairs after an over-week-long uptrend on Tuesday as an overall risk-off mood permeates markets, which, in turn, weighs on the risk-sensitive Peso. 

During the Asian session, after a bright start, Chinese stocks fell on the news that a highly-anticipated briefing by the Chinese state planner had failed to deliver the expected levels of investment.  

Mexican Peso edges lower on risk-off tone to markets

The Mexican Peso edges lower on Tuesday on the back of increasingly negative market sentiment triggered by disappointing news out of Beijing. In common with other emerging-market currencies, the Mexican Peso tends to weaken when the global outlook turns sour. 

An opening-bell rally in China’s benchmark CSI 300 equity index was abruptly cut short after the China National Development and Reform Commission (NDRC) Chairman Zheng Shanjie announced only $28 billion in extra funds to local governments on Tuesday. 

Despite following the huge package of measures announced by the People’s Bank of China (PBoC) last week, which constitutes the largest liquidity pump since the Covid pandemic, investors deemed the additional fiscal stimulus inadequate for China to hit its growth targets for the year. 

Asian stocks pared their early gains on the news, while commodities weakened substantially as a result of a weaker global growth outlook, and European stocks are trading in the red after their opening. 

Markets warm to Sheinbaum administration

The downside for the Peso may be limited, however, by easing political risks as President Claudia Sheinbaum’s administration takes over from that of her previous incumbent, Andres Manuel Lopez Obrador (AMLO). The early signs are that markets are assessing her as more investment-friendly than her predecessor. 

On Monday, the newly appointed coordinator of the government's Business Advisory Council, businesswoman Altagracia Gómez, said she had been working together with 13 automotive companies with facilities in Mexico to jointly agree a ten-point action plan for developing the country’s key car-manufacturing industry.

These included the overall development of local suppliers, with a special focus on micro, small, and medium-sized enterprises (MSMEs), providing a greater provision of financing for companies, and enhancing skills training for the industry, with a focus on integrating young people into the workforce, said El Financiero. 

The Peso weakened by 10% after Sheinbaum’s election in June on investors’ concerns she would carry the torch of her mentor AMLO’s radical reform program, which outsiders viewed as anti-market, undemocratic, and, in the case of judicial reforms as undermining the independence of judges.

AMLO passed a controversial judicial reform bill as his last major act in parliament before handing over to Sheinbaum on October 1, which allowed for the election of judges rather than their appointment. However, the new law has already faced delays due to a Supreme Court decision to re-examine it, with a view to revising the contents if they are deemed as putting at risk the independence of judges. 

Technical Analysis: USD/MXN breaks below 50-day Moving Average

USD/MXN breaks below the 50-day Simple Moving Average (SMA) and tests the bottom of a medium-term rising channel.  

USD/MXN Daily Chart 

USD/MXN could find firm support at the base of the channel, and it may recover and start to rise again. After all, the medium and longer-term trends are bullish, and given the technical analysis principle that “the trend is your friend,” this favors a continuation higher.

On Friday, the pair formed a bullish Japanese Hammer candlestick pattern at the base of the channel (orange rectangle on the chart above). This was followed by a slightly bullish green Japanese Doji candlestick on the following day. It’s possible this configuration could mark a turning point for the short-term trend and the start of a recovery. Since then, however, the price has shown no signs of rising any higher.

In fact, the short-term trend remains bearish and the pair has now broken below the 50-day SMA, a key level.  A decisive breakout below the channel would risk reversing the medium-term uptrend in the USD/MXN. 

A decisive break would be one characterized by a longer-than-average bearish candlestick that pierced cleanly below the channel line and closed near its low. Such a break would then probably follow-through lower to an initial downside target at 19.00 (August 23 low, round number) and then 18.65, the level of the 100-day SMA.