Mexican Peso upside continues despite goodish US inflation data, strong US Dollar


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Most recent article: Mexican Peso strengthens for fifth day as US economic data dampens rate hike expectations

  • Mexican Peso climbs against the US Dollar, influenced by US inflation data and the rise in US Treasury yields.
  • Banxico maintains a less hawkish stance on interest rates, with potential rate cuts hinted for the next year, capping the Peso’s advancement.
  • Banxico's Deputy Governor Jonathan Heath reiterated they could cut rates next year, though the stance would remain restrictive.

Mexican Peso (MXN) edges higher against the US Dollar (USD) on Wednesday, gains for the eighth straight day due to investors' speculations the Federal Reserve (Fed) wouldn’t hike rates after soft inflation data in the United States (US). Additionally, a risk-on impulse sponsored the Peso’s advance despite a jump in US Treasury bond yields, which capped the Peso’s advance in early trading. The USD/MXN falls 0.09% and trades at 17.32, at the time of writing, it’s reclaiming the 100-DMA.

At the latest Bank of Mexico (Banxico) monetary policy decision on November 9, the Government Board held rates unchanged and sounded less hawkish, saying that rates need to be at the current level for “some time.” On Monday, Governor Victoria Rodriguez Ceja said that rate cuts could be in play next year; words echoed by Deputy Governor Jonathan Heath on Tuesday. He said that the monetary policy will remain restrictive despite cutting interest rates.

On the data front, Mexico’s calendar is empty. In the US, data showed prices paid by producers declined, while retail sales shrank in October, but previous figures were upward revised, suggesting consumers' resilience despite the Fed's restrictive stance.

Daily digest movers: Mexican Peso trims some of its Tuesday’s gains, as Banxico adopts a neutral stance

  • The US Producer Price Index (PPI) rose 1.3% in the year to October, below estimates of 1.9% and monthly deflated 0.5%, beneath forecasts of a 0.1% expansion.
  • Retail Sales fell 0.1% MoM, less than the 0.3% contraction expected. Sales in the 12-month period rose by 2.5%, below September’s 4.1% increase.
  • Banxico’s Deputy Governor Jonathan Heath added the Government Board continues to monitor real rates, which currently lie at around 7%.
  • Heath said Banxico wouldn’t rely on other countries – usually, Banxico reacts to the US Federal Reserve’s decisions – and said they would depend on incoming data and how inflation expectations evolve.
  • On Monday, Banxico’s Governor Victoria Rodriguez Ceja commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
  • The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
  • Mexico’s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
  • Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso almost flat, with USD/MXN hovering around the 100-day SMA

The USD/MXN pair bias has shifted to neutral downwards in the short term, and the pair is on the brink of breaking crucial support levels like the 100-day Simple Moving Average (SMA) at 17.34, followed by the psychological 17.00 figure. The pair could shift bearishly as the 20-day SMA accelerates and breaks below an area comprised of the 50 and 200-day SMAs at around 17.70-17.65. If the bearish cross completes, it would shift the broader trend downwards and open the door to challenging the year-to-date (YTD) low of 16.62, printed in July.

On the other hand, if buyers keep the USD/MXN pair above 17.33 and reclaim 17.50 in the near term, they could remain hopeful of testing key resistance levels, like the 200-day SMA at 17.65, ahead of the 50-day SMA at 17.70. Once cleared, the next resistance emerges at the 20-day SMA at 17.87 before buyers could lift the spot price towards the 18.00 figure.

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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