Mexican peso rises as reform drama fails to unnerve investors

Mexico’s Senate passes controversial judicial reform, but the peso gains as investors focus on a potential easing cycle by the Federal Reserve.
The USD/MXN pair is down 1.63%, with traders pricing in an 85% probability of a 25 basis point rate cut at the Federal Reserve’s September meeting.
US inflation data raises doubts about a 50 basis point interest rate cut, while US economic data, including producer price indices and consumer sentiment, could impact the USD/MXN exchange rate.

The Mexican peso rebounded against the U.S. dollar on Wednesday as investors shrugged off the passage of a controversial reform by the Mexican Senate that threatens state law. Expectations that the Federal Reserve (Fed) will begin an easing cycle next week are keeping the peso ahead. USD/MXN is at 19.79, down 1.41%.

Mexico’s economic report revealed that industrial production in July was lower than expected based on monthly data, while it rose year-on-year. Political tensions rose after Mexico’s Senate voted to approve judicial reform by 86 votes to 41.

Now that the bill has been approved, it will be sent to the 32 state congresses. The reform needs the approval of 17 congresses to become law in the Mexican constitution.

Across the border, data from the US Bureau of Labor Statistics dampened traders’ hopes for a 50 basis point (bps) rate cut by the Fed. US inflation remains within the US central bank’s target range, but MoM’s fundamental data rose.

This boosted the Greenback, although the gain was short-lived. The U.S. Dollar Index (DXY), which tracks the dollar’s performance against a basket of currencies, is virtually unchanged at 101.70, up 0.05% following the CPI release.

Meanwhile, sources cited by Bloomberg say that if the Fed does not cut interest rates by 50 basis points in September, it will do so in November, according to Krishna Guha of Evercore.

Futures traders have lowered the odds of a 50 basis point rate cut to 15%, while the odds of a 25 basis point cut have risen to 85%, according to data from the CME FedWatch Tool.

The Mexican calendar will be empty for the rest of the week. In the US, the schedule will include employment data, the Producer Price Index (PPI) and US consumer sentiment data, which could affect the USD/MXN pair.

Daily Market Factors Review: Mexican Peso Strengthens After Senate Approval of Judiciary Reform

Mexico’s industrial production fell 0.4% to 0.2% month-on-month in July. Year-on-year, production rose 2.1%, crushing forecasts for a 1.1% augment and improving from a -0.7% decline.
Mexico’s inflation fell below 5% year-on-year in August, while core inflation remained close to 4% year-on-year.
A September Citibanamex survey showed that Banxico would likely cut interest rates to 10.25% in 2024 and to 8.25% in 2025. The USD/MXN exchange rate is forecast at 19.50 at the end of 2024 and 19.85 at the end of 2025.
CPI data from the US Bureau of Labor Statistics revealed that headline inflation fell from 2.9% to 2.6% year-on-year in August, in line with expectations.
Still, core US CPI, which excludes volatile items and is sought as a realistic indicator of inflation, was stuck at 3.2% year over year. In monthly data, core CPI rose from 0.2% to 0.3%, while headline CPI was 0.2% month over month.
Data from the Chicago Board of Trade indicate the Fed will cut interest rates by at least 98 basis points this year, down from 108 points a day earlier, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican Peso Soars, USD/MXN Falls Below 19.80

USD/MXN’s uptrend is intact, although the pair is falling following the approval of the judicial reform. The pair hit a up-to-date weekly low of 19.74, although some buyers entered the market after the drop to the latter.

The Relative Strength Index (RSI) is mixed as the indicator is bullish but the slope suggests that sellers are gaining momentum as the RSI is heading towards the neutral 50 line. Hence, in the miniature term, the exotic pair is tilted downwards.

If USD/MXN holds below 20.00, the first support will be 19.50. A break of this latter level will expose the August 23 swing low of 19.02 before paving the way for sellers to test the 50-day elementary moving average (SMA) at 18.85.

On the other hand, USD/MXN needs to break through the psychological 20.00 level to continue its gains. If breached, the next stop would be the YTD 20.22 level. With further strengthening, the pair could challenge the intraday high of September 28, 2022 at 20.57. If these two levels are breached, the next stop would be the swing high of 20.82 on August 2, 2022, before 21.00.