Mexican Peso wraps a positive day and week against US Dollar, ahead of US CPI

USD/MXN drops as revised US inflation data fuel expectations for Fed easing.
US inflation adjustments show success in price control, leading to a weakened Dollar outlook.
Banxico holds rates at 11.25%, with changes in policy statements indicating a careful stance on future adjustments.
Federal Reserve officials continue to advocate for the appropriateness of current monetary policy.

Mexican Peso (MXN) appreciated against the US Dollar (USD), set to finish the week with gains of 0.31%. Data from the United States (US) confirmed the downtrend on inflation remains in place, which could open the door for the US Federal Reserve (Fed) to lower interest rates toward the second half of the year. The USD/MXN is trading at 17.09, on the daym reflecting a decline of 0.36%.

Mexico’s economic docket during the last two days has been busy. Inflation is heading up, while the Bank of Mexico (Banxico) decided to hold rates at 11.25%, though it removed hawkish language from the monetary policy statement. Instead, they added, “In the next monetary policy meetings, it will assess, depending on available information, the possibility of adjusting the reference rate.”

Across the border, Atlanta’s Fed President Raphael Bostic said the Fed must be resolute and added that he’s “laser-focused” on inflation. At the same time, Dallas Fed President Lorie Logan noted that there’s no urgency on cutting rates.

Daily digest market movers: Mexican Peso appreciates despite Banxico dropping hawkish comments

Banxico’s Governing Council stated that inflationary risks are tilted to the upside in the near term while adding that higher core inflation, foreign exchange depreciation, and a greater-than-expected economic resilience in the country would keep inflationary pressure up.
On the downside, a global economic slowdown and lower exchange rate levels in relation to the first months of 2023 “contribute more than anticipated to reduce certain pressures on inflation.”
Mexico’s central bank revised their inflation expectations to the upside for Q1 to Q3 of 2024, and they expected to converge toward 3.5% in Q4.
Before Wall Street opened, the National Statistics Agency (INEGI) announced that Mexican Industrial Production fell 0.7% in December from November and was flat YoY.
On Thursday, INEGI revealed that Mexico´s Consumer Price Index (CPI) in January, rose by 4.88% YoY, while underlying inflation moderated to 4.76%.
The US Bureau of Labor Statistics (BLS) released an inflation data revision, indicating that US inflation rates at the end of 2023 were consistent with initial reports, even after annual revisions. The core CPI, which excludes food and energy, increased at a 3.3% annualized rate in Q4 2023, aligning with previous estimates. The headline inflation figure saw minimal adjustments with December's monthly rise slightly revised down to 0.2% from 0.3%.
US Initial Jobless Claims of 218K for the last week were lower than estimates of 220K, down from 227K in the previous reading.
US Federal Reserve officials remain cautious about guiding market participants about when they would begin easing policy. Yesterday, Richmond Fed President Thomas Barkin was asked about Powell’s comments: “Chairman Powell always speaks for the Committee.”

Technical analysis: Mexican Peso surges as USD/MXN tumbles below 17.10

The USD/MXN is neutral to downwardly biased after clashing with the 50-day Simple Moving Average (SMA) at 17.12 with buyers unable to decisively break that level. Since then, the exotic pair has resumed its downtrend, though it could remain at around the 17.05/17.17 range. Further downside lies ahead as the Relative Strength Index (RSI) shows bears are gathering momentum with the slope peaking two days ago before extending its downtrend. The next support levels lie at 17.05, the psychological 17.00 figure and last year’s low of 16.62.

On the other hand, if buyers reclaim the 50-day SMA, that can pave the way to test the 200-day SMA at 17.31. Upside risks emerge once that barrier is cleared. The next real resistance comes at 17.41, the 100-day SMA.

USD/MXN Price Action – Daily Chart

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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