Mexican Peso reverses lower vs USD after Nonfarm Payrolls reveals strong labor market

The Mexican Peso (MXN) loses some of its earlier gains against the US Dollar (USD) on Friday following the release of the US Nonfarm Payrolls (NFP) report, the most significant labor market release for the United States (US). The report showed an improvement in almost all employment metrics, including payrolls, the Unemployment Rate and Average Hourly Earnings. 

The US Bureau of Labor Statistics (BLS) Nonfarm Payrolls (NFP) report showed a rise of 254K new employees joined the US workforce in September, higher than the upwardly-revised 159K in August, and above estimates of 140K. 

The US Unemployment Rate, meanwhile, fell to 4.1%, which was below the 4.2% of August, and the 4.2% expected. 

Average Hourly Earnings in the US rose 4.0% annually from a revised-up 3.9% in August and was above expectations of 3.8%. 

On a monthly basis Average Hourly Earnings fell to plus 0.4% from the upwardly-revised 0.5% MoM in August and was above the 0.3% forecast by economists.

The data indicated the US labor market is in much better shape than expected and means the Federal Reserve (Fed) is less likely to implement a double-dose 50 basis points (bps) (0.5%) rate cut at the November meeting. This in turn, is positive for the US Dollar since the maintenance of elevated interest rates results in higher foreign capital inflows and more demand for USD.

Mexican Peso strengthens then weakens against USD

The Mexican Peso has risen for most of the week, however. Initial gains came on the back of comments from the Deputy Governor of the Bank of Mexico (Banxico) Jonathan Heath, who said on Tuesday that interest rates should remain higher for “more time”. Higher interest rates encourage more foreign capital inflows and strengthen the Peso. Later in the week, news of a Supreme Court decision to review and potentially revise controversial reforms to the judiciary encouraged a continuation of the rally.

Mexican Peso appreciates following Supreme Court motion

The Peso rallied on Thursday after the news that Mexico's 11 Supreme Court judges voted by a majority of eight to three to re-examine controversial constitutional reforms to the judiciary, passed by the government in September. The move could block the implementation of the reforms, which seek to have judges elected rather than appointed, according to El Financiero. 

Mexican financial markets took a beating in June after the election of the Morena-led government amid investor concerns regarding these and other proposed reforms. They were a contributing factor in a 10% depreciation of the Mexican Peso. Critics argue that they threatened the independence of the judiciary, were anti-democratic, and endangered outside investment. 

The new laws, which were voted in by the Mexican Parliament in September, remain a risk to Mexican assets including the Peso, as highlighted by advisory service Capital Economics in a recent note: 

“At the moment, Mexico has an investment grade rating from all three major rating agencies and we doubt this will change in the near-term,” wrote Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics, adding, “That said, if the judicial reform leads to a significant deterioration in the quality of institutions and weaker growth and fiscal policy isn’t tightened sufficiently, there is a risk that Mexico is downgraded in the medium-term.” 

The decision to have the reforms re-examined has been spear-headed by Supreme Court Judge Juan Luis González Alcántara. It rests on the legal principle that the new laws risk undermining the independence of Mexico’s judiciary. 

Whilst the Supreme Court does not have the power to annul the laws, it can decide whether they need to be revised. Morena’s Head of the Government of Mexico City, Marti Luis Batres, described the move as a “coup d’etat”. 

Technical Analysis: USD/MXN falls to 50-day Moving Average

USD/MXN falls all the way down to the base of its rising channel and the level of the 50-day Simple Moving Average (SMA) – a key line in the sand for traders.  

USD/MXN Daily Chart 

USD/MXN is expected to find support at this level, and there is a chance it will rebound and start moving higher within the range again. The medium and longer-term trends are now bullish, and given the technical analysis principle that “the trend is your friend,” the odds favor a recovery and continuation higher.

That said, the short-term trend is bearish, and the GBP/MXN cross has broken below its rising channel already, which can sometimes be a “canary in the coalmine” warning for other Peso pairs.  

A decisive break below the channel and the 50-day SMA, therefore, risks threatening the medium-term uptrend in the USD/MXN. Such a move would be characterized by a longer-than-average bearish candlestick that pierced cleanly below both the channel line and the SMA, and closed near its low. Such a break would clear the way for losses, first down to 19.00 (August 23 low, round number) and then 18.60, the level of the 100-day SMA.