Mexican peso falls on negative sentiment after weaker ISM report

Mexican peso falls more than 1% after posting solid gains.
Mexico’s economic data shows no change in business confidence and a decline in activity in the manufacturing sector.
The Federal Reserve is hinting at a possible interest rate cut in September, prompting investors to turn to the safe-haven US dollar.

The Mexican peso is erasing earlier gains and falling against the U.S. dollar, extending a week of losses after the U.S. Federal Reserve (Fed) kept interest rates unchanged and opened the door to a possible cut at its upcoming September meeting. That buoyed the peso, which rose to a high of 18.42 before erasing those gains, as USD/MXN trades at 18.85, up more than 1%.

Risk aversion has Wall Street trading at a loss, undermining high-beta currencies like the Mexican peso. Traders are flocking to the safe-haven Greenback, even as U.S. Treasury yields fall after Wednesday’s Fed decision.

Mexico’s economic data revealed that business confidence was unchanged in July from June, while a measure of business activity released by S&P Global showed manufacturing activity contracted for the first time since September 2023.

Meanwhile, the U.S. data is providing the Fed with the tools it needs to lower borrowing costs after Wednesday’s decision. The Federal Open Market Committee (FOMC) said it would “not be appropriate to lower the target range until it has greater confidence” in the disinflation process, reaching its 2% target.

Although hawkish, Fed Chairman Jerome Powell said that if the labor market weakens significantly, “we should respond.” That was in response to a question about a September rate cut, which he said if the data changes that quickly, easing in September would be “on the table.”

The comments were followed earlier by a report on initial claims for unemployment benefits in the US, which showed continued weakness in the labor market as the number of Americans applying for unemployment benefits rose.

Other data showed manufacturing activity weakened, raising concerns that the economy could leisurely much more than expected and heightening fears of a recession.

On that note, Friday’s nonfarm payroll report for July will be a key piece of the puzzle as the Federal Reserve begins to grow concerned about the labor market.

Following Powell’s remarks, market participants priced in three 75 basis point rate cuts by year-end.

Daily Market Factors Review: Mexican Peso Falls on Falling Manufacturing Activity

Mexico’s S&P Global Manufacturing PMI fell to 49.60 in July, down from June’s gain of 51.10, underscoring the slowing economy.
The business confidence index remained unchanged in July at 52.9.
Mexico’s gross domestic product (GDP) rose 0.2% q/q in Q2, below estimates of 0.4% and 0.3% growth in Q1. On an annual basis, GDP in Q2 2024 rose 2.2% y/y from the preliminary reading, exceeding estimates of 2% and 1.6% growth in the previous quarter.
The Federal Reserve decided to keep interest rates unchanged, commenting that good inflation data and further weakness in the labor market could be the impetus to take action.
Initial jobless claims in the U.S. rose by 248,000 in the week ending July 27, exceeding estimates of 236,000 and 235,000 in the previous week.
The Institute for Supply Management’s (ISM) manufacturing PMI fell to 46.8 in July from 48.5, below estimates of 48.8, and the lowest reading since December 2023.
Today’s jobless claims data and Wednesday’s ADP Employment Change for July, which were not released to the market, could be a prelude to Friday’s Nonfarm Payrolls. Estimates suggest the U.S. economy added 175,000 workers to the labor force, down from June’s 206,000.
Data from the Chicago Board of Trade (CBOT) show that December 2024 federal funds rate futures suggest policymakers will ease policy by at least 80 basis points.

Technical Analysis: Mexican Peso Retreats, USD/MXN Rise Above 18.60

USD/MXN is up after falling to 18.40 but is recovering, with traders eyeing the 18.75 level after Wednesday’s losses. Momentum favors buyers, who took a breather as the RSI broke through oversold levels, according to the Relative Strength Index (RSI).

To sustain the rally, USD/MXN needs to challenge the yearly (YTD) high of 18.99 and then the psychological level of 19.00. Further growth is seen on March 20, 2023, at 19.23, before 19.50.

On the bearish side, a move below 18.50 could see a test of the psychological 18.00 level and then a test of the 50-day elementary moving average (SMA) at 17.97.