Mexican Peso falls amid strong US Dollar on high US yields

• Mexican Peso drops, weighed by risk-off mood and strong US economic data.
• Banxico Deputy Governor Omar Mejia hinted at a negative output gap by late 2024, potentially influencing future inflation.
• Traders await Mexico’s September inflation data and Banxico meeting minutes, with expectations for further rate cuts by year-end.

The Mexican Peso depreciates against the US Dollar as high US Treasury yields underpin the Greenback on Tuesday. This and news that China’s stimulus program fell short of market expectations weighed on the emerging market currency. The USD/MXN trades at 19.35, up over 0.50%.

During the Asian session, newswires revealed that Zheng Shanjie, the head of China’s National Development & Reform Commission (NDRC), failed to provide details about the shape and size of the government's fiscal stimulus. This spurred a sell-off in Chinese equities and shifted sentiment sour.

That undermined the Mexican Peso amid a scarce economic docket. Traders are eyeing the release of inflation figures on Wednesday and the Bank of Mexico’s (Banxico’s) latest policy meeting minutes on Thursday.

On Monday, Banxico’s Deputy Governor Omar Mejia said estimates suggest the economy could print a negative output gap by the end of 2024. Mejia added that it could influence prices when output drops below its full potential.

A Reuters survey showed analysts estimate the Consumer Price Index (CPI) for September in Mexico will fall to 4.62%, its lowest level since March. Meanwhile, the Core CPI for the same period is foreseen dipping to 3.96%, extending its trend for the 20th straight month.

Last week, Banxico Governor Victoria Rodriguez said that future cuts could be bigger so long as the inflation rate continues to fall.

In the last meeting, Banxico lowered rates to 10.50% in September, as is expected to lower borrowing costs by 25 basis points (bps) in the two upcoming meetings, on November 14 and December 19. Markets estimate the main reference rate to finish the year at 10% and to 8% in 2025.

Across the border, last Friday’s US Nonfarm Payrolls (NFP) report sparked the Federal Reserve (Fed) to reverse its rate cuts. Once the news headline showed the economy adding over 254,000 people to the workforce, traders scrambled to price in just one 25 bps cut instead of a 50.

Meanwhile, Fed officials crossed the wires. Governor Adriana Kugler said she “will support” more cuts if inflation declines. Echoing some of her comments was the St. Louis Fed’s Alberto Musalem, who stated that he will go slow on interest rate cuts if it makes sense.

In the US, the schedule will feature many speeches by Fed officials, inflation data on the consumer and producer sides, and the University of Michigan (UoM) Consumer Sentiment for October.

Daily digest market movers: Mexican Peso pressured by strong US Dollar, ahead of inflation data

• Last Thursday, Mexico’s Supreme Court voted eight to three to "consider a constitutional challenge to the controversial judicial overhaul enacted last month," which would allow the election of judges and Supreme Court magistrates through electoral vote.
• According to Banxico’s poll, the central bank is projected to lower rates by 50 bps to 10% for the remainder of 2024. Meanwhile, the USD/MXN exchange rate will end at around 19.69.
• Mexico’s economy is projected to grow by 1.45% in 2024, lower than August’s 1.57%.
• After the outstanding US jobs report, Citi added its name to JPMorgan and Bank of America and changed its November Fed call from a 50 to 25 bps cut.
• US Treasury yields skyrocketed and underpinned the US Dollar, which continues to appreciate against the Peso.
• Data from the Chicago Board of Trade (CBOT) via the December fed funds rate futures contract shows investors estimate 49 bps of easing by the Fed toward the end of 2024.
• Market participants have disregarded a 50 bps cut. The odds of a 25 bps cut are 85.3%, while the chances for holding rates unchanged are at 14.7%, according to the CME FedWatch Tool data.

USD/MXN technical outlook: Mexican Peso drops as USD/MXN jumps above 19.30

Despite falling below the 50-day Simple Moving Average (SMA) at 19.36, the USD/MXN remains upwardly biased. Momentum supports sellers with the Relative Strength Index (RSI) standing in bearish territory. Nevertheless, the RSI is aiming upwards, and in the short term the exotic pair could extend its gains if buyers maintain the momentum.

If USD/MXN clears the psychological 19.50 level, look for buyers driving the exchange rate toward the October 1 daily high of 19.82, ahead of 20.00. Up next would be the YTD peak of 20.22.

For a bearish resumption, if USD/MXN drops below the October 4 wing low of 19.10, the 19.00 figure will be exposed. Once broken, the next support would be the 100-day SMA at 18.64.