The Mexican peso is making a delayed recovery and ends the week lower

The Mexican peso rebounded delayed in the session, supported by mighty third-quarter GDP data and lower inflation mid-month.
Concerns persist as Mexico’s legislative changes could impact its status under the USMCA, potentially impacting trade dynamics.
Governor Banxico indicates readiness to further reduce interest rates if inflation trends continue, which will affect the strength of the Peso.
US economic data, including better-than-expected S&P Global Flash PMI indexes and UoM consumer sentiment, strengthened the US dollar.

The Mexican peso sees a rebound towards the end of the North American session and registers minimal gains against the US dollar. Strong economic data from Mexico and the US ultimately supported the peso, ending the day in positive territory, although down 0.26% for the week. At the time of writing, the USD/MXN rate is 20.39, down 0.04%.

In Mexico, the Instituto Nacional de Estadistica Geografía e Informatica (INEGI) released its final gross domestic product (GDP) reading for the third quarter of 2024, which beat estimates on a quarterly and annual basis. At the same time, November mid-month inflation was lower than the previous month’s reading and estimates on a headline and core basis, suggesting that the Bank of Mexico (Banxico) may continue to ease policy.

According to the S&P Global Flash PMI index for November, the US economic report revealed that business activity improved. Meanwhile, University of Michigan (UoM) consumer sentiment improved in November compared to the previous reading, while inflation expectations for the year fell.

This and geopolitical fluctuations strengthened USD/MXN towards fresh weekly highs of 20.55. It is worth noting that the Mexican Chamber of Deputies approved the dissolution of the autonomous bodies, which experts say exposes Mexico to exclusion from the USMCA free trade agreement.

Bank of Mexico Governor Victoria Rodriguez Ceja said the bank is ready to cut interest rates if inflation continues to fall. This would put downward pressure on the peso, which has lost value after former US President Donald Trump’s victory strengthened the dollar. Since then, the Federal Reserve (Fed) has taken a cautious stance on easing policy as some of Trump’s proposals put inflationary pressure on.

Money market participants have become more cautious about Fed rate cuts. The CME FedWatch Tool suggests investors see a 56% chance of a 25 basis point rate cut at the December meeting, down from 59% the day before.

Next week, Mexico’s economic schedule will include third-quarter current account data, October’s trade balance and minutes from the Bank of Mexico’s latest policy meetings. As for the U.S., the files would include the release of the Fed’s latest meeting minutes, robust goods orders, and the release of the Fed’s favorite measure of inflation, the Price Index for Basic Personal Consumption Expenditures (PCE).

Daily market movement summary: Mexican peso falls as bets on Banxico interest rate cuts raise

In early November, Mexico’s average monthly inflation rate fell, increasing speculation that Banxico would ease policy.
Headline inflation reached 4.56% y/y, up from 4.69% in the previous month, after rising in the previous two two-week periods. According to a Reuters poll, economists expected inflation to remain unchanged.
Core inflation, usually seen as a better measure of price trends because it ignores volatile energy and food prices, was below the forecast of 3.72% at 3.58% y/y.
Mexico’s third-quarter 2024 GDP grew 1.1% in the third quarter compared to the second quarter, almost in line with the 1.0% growth expected by economists.
On an annual basis, the economy grew 1.6% from a year earlier, slower than the previous reading and just above the 1.5% expected by economists.
The US S&P Global Services and Composite PMI indexes for November rose by 57.0 and 55.3, exceeding the previous month’s reading; as expected, the manufacturing PMI improved from 48.5 to 48.8.
IU consumer sentiment improved from 70.5 to 71.8 in November, but fell miniature of the target. Inflation expectations for the year fell in line with projections from 2.7% to 2.6%.
Data from the Chicago Board of Trade, via the December Federal Funds Rate Futures contract, shows investors estimate the Fed will be at 22 basis points by the end of 2024.
Last week, Moody’s revised Mexico’s credit outlook to negative, citing constitutional reforms that could negatively impact Mexico’s economic and fiscal strength.

USD/MXN Technical Outlook: Mexican Peso Falls as USD/MXN Rates Above 20.45

USD/MXN remains bullish despite returning below the psychological mark of 20.50. A break of the latter will expose the intraday high of 20.55, followed by the November 12 high of 20.69. After clearing, the next resistance will be the year-to-date (YTD) high at 20.80.

If sellers push the exchange rate below 20.00, they could test the 50-day basic moving average (SMA) and November 7 low around 19.75/78 and then the 19.50 level.

Indicators such as the Relative Strength Index (RSI) remain bullish in the miniature to medium term, suggesting further growth is possible.