Mexican Peso steady amid mixed messages from Fed and Banxico, focus shifts to US data
Most recent article: Mexican Peso on the defensive against US Dollar as US GDP exceeds forecasts
- Mexican Peso counterattacks, erasing its earlier losses sponsored by Fed’s commentary.
- Fed’s Governor Christopher Waller opened the door for rate cuts if inflation progress continues for several months.
- Banxico Heath’s dovish remarks continue to weigh on the Mexican currency.
Mexican Peso (MXN) prints slim losses against the US Dollar (USD), with the USD/MXN virtually unchanged, up by a marginal 0.01%, after hitting a daily high of 17.21. Market participants are digesting recent comments from US Federal Reserve (Fed) officials Christopher Waller and Chicago Fed President Austan Goolsbee. At the time of writing, the exotic pair exchanges hands at around 17.14.
Mexico’s scarce economic docket keeps USD/MXN traders focused on US economic data. The US Conference Board (CB) revealed that Consumer Confidence in November rose above forecasts and October’s downward revised data. At the same time, Fed Governor Christopher Waller commented that there are good economic arguments that rates could be lowered if inflation continues falling for several months. That sponsored a leg-down in the exotic pair, as flows exited from the greenback, toward riskier assets.
Meanwhile, USD/MXN trader prepare for Wednesday’s data, as the US economic docket will feature the release of the Gross Domestic Product (GDP) for Q3, expected to climb the first estimate of 2.1%.
Daily digest movers: Mexican Peso is parked at around the 17.05/17.15 range after Banxico Heath’s remarks
- On November 27, Banxico’s Deputy Governor, Jonathan Heath, commented that core prices must come down more, adding that one or two rate cuts may come next year, but “very gradually” and “with great caution.”
- November’s US CB Consumer Confidence rose 102, above forecasts and October’s data, each at 101 and 99.1, respectively.
- On November 24, a report revealed the economy in Mexico grew as expected in the third quarter on an annual and quarterly basis, suggesting the Bank of Mexico would likely stick to its hawkish stance, even though it opened the door for some easing.
- Mexico's annual inflation increased from 4.31% to 4.32%, while core continued to ease from 5.33% to 5.31%, according to data on November 23.
- The financial markets' narrative that the US Federal Reserve (Fed) is done hiking rates has kept the Greenback on the backfoot, but today, it has found some relief. The US Dollar Index (DXY) is down 0.18%, exchanging hands at 103.00.
- Data published earlier this month showed prices paid by consumers and producers in the US dipped, increasing investors' speculations that the Fed’s tightening cycle has ended.
- A Citibanamex poll suggests that 25 of 32 economists polled expect Banxico's first rate cut in the first half of 2024.
- The poll shows “a great dispersion” for interest rates next year, between 8.0% and 10.25%, revealed Citibanamex.
- The same survey revealed that economists foresee headline annual inflation at 4.00% and core at 4.06%, both readings for the next year, while the USD/MXN exchange rate is seen at 19.00, up from 18.95, toward the end of 2024
- The swap market suggests traders expect 85 basis points of rate cuts by the Fed in 2024.
Technical Analysis: Mexican Peso losses strength as USD/MXN stays near the weekly high
The USD/MXN has consolidated during the last seven days, within the 17.05/17.20 area, unable to drop or rise above the range, while the 20-day Simple Moving Average (SMA) at 17.37 aims toward the 100-day SMA at 17.34, suggesting that sellers are gathering momentum in the short term. Hence, they need to reclaim the 17.05 figure, ahead of driving prices toward the 17.00 figure and below.
Contrarily, buyers must pierce the 17.20 area and reclaim the 100-day SMA, so they could threaten to test the 200-day SMA at 17.58 before they rally to the 50-day SMA at 17.68, both dynamic resistance levels.
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.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
