Mexican Peso weakens on lower inflation data, USD revival

Source Fxstreet
  • The Mexican Peso weakens after the release of lower inflation data. 
  • This is expected to speed-up interest-rate cuts by the Bank of Mexico, reducing inflows. 
  • The US Dollar resurfaces from the depths, reviving USD/MXN’s medium-term uptrend. 

The Mexican Peso (MXN) seesaws between tepid gains and losses in its most heavily-traded pairs on Thursday after weakening for two days in a row. The Peso began to fall at the start of the week due to a pronounced risk-off tone permeating markets which tends to disproportionately disadvantage emerging market currencies. 

Sentiment soured as investors made clear their disappointment at the lack of stimulus measures announced by the China National Development and Reform Commission (NDRC) over the weekend. These concerns later eased, however, after China’s Finance Ministry said it would announce a fresh package of fiscal measures on October 12. 

On Wednesday the Peso continued to weaken following the release of lower-than-expected Mexican inflation data. This showed that in the 12 months to September the headline rate of inflation fell to 4.58%, from 4.99% recorded in August. A strengthening US Dollar (USD) supplied a further headwind.

The decline in inflation increases the probability of the Bank of Mexico (Banxico) will make deeper cuts to interest rates in the near future. This, in turn, could reduce foreign capital inflows, resulting in lower demand for the Mexican Peso. 

Mexican Peso could find support from new wage laws

The Mexican Peso might gain some support from new wage laws passed on Wednesday which enshrine in the constitution workers rights to see their wages rise in line with inflation. 

“With 124 votes in favor..the Senate of the Republic approved in general and in particular the reform to establish the annual fixing of general or professional minimum wages, as well as their revision, and that they never be below inflation,” reported El Financiero. 

“The purpose of the reform is to ensure that Mexicans' income does not fall below inflation, which will favor their purchasing power. Therefore, year after year, increases or adjustments could be made based on inflation,” the report went on. 

The benchmarking of wages to inflation could slow the disinflationary trend, if workers continue spending at current rates. In addition, if businesses pass on inflation-linked employee wage costs to consumers this will also maintain inflation. 

Continued elevated inflation would, in turn, delay any cuts to interest rates planned by Banxico – or make the reductions more gradual – with the side-effect of propping up the Mexican Peso. 

Sheinbaum takes control of Mexican Oil

The Mexican Peso has seen volatility due to rising political risk premia since the re-election of the Morena-led government in June and this could revive as foreign investors digest the news that President Claudia Sheinbaum is moving to take greater control of Mexico’s Oil state-backed industry.  

On Wednesday, Mexico’s Congress debated the reclassification of two of Mexico’s largest OIl producers, Pemex and the Federal Electricity Commission (FEC) with a view to increasing their control of the companies and renaming them as “public enterprises.” The change “would force them to prioritize the government's social and economic objectives over corporate profits,” according to El Financiero.

The reform was initially proposed by Sheinbaum's mentor and predecessor, former President Andrés Manuel López Obrador (AMLO), and is expected to win the approval of the ruling coalition's decisive majority in Congress.

Technical Analysis: USD/MXN starts rising from base of channel

USD/MXN starts to recover after touching the base of a medium-term rising channel.  

USD/MXN Daily Chart 

USD/MXN is probably starting a new uptrending leg within its ascending channel. The medium and longer-term trends are bullish, and given the technical analysis principle that “the trend is your friend,” this favors a continuation higher.

On October 4 the pair formed a bullish Japanese Hammer candlestick pattern at the base of the channel (orange rectangle on the chart). This was followed by a slightly bullish Japanese Doji candlestick and then two green up candles. This configuration marks the reversal of the short-term trend which is now technically bullish. 

USD/MXN has just reached resistance at 19.51 (August 22 high) if it can break above 19.57 it will signal a clearance of this resistance and a probable continuation higher to the next upside target at around 19.83 (October 1 high).

Economic Indicator

12-Month Inflation

The 12-month inflation index released by the Bank of Mexico is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of Mexican Peso is dragged down by inflation. The inflation index is a key indicator since it is used by the central bank to set interest rates. Generally speaking, a high reading is seen as positive (or bullish) for the Mexican Peso, while a low reading is seen as negative (or Bearish).

Read more.

Last release: Wed Oct 09, 2024 12:00

Frequency: Monthly

Actual: 4.58%

Consensus: 4.62%

Previous: 4.99%

Source: National Institute of Statistics and Geography of Mexico

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
placeholder
Gold ends three-week slide at the $4,400 line — eight straight days of ETF inflows vs a 5% 10-year and a 100 dollarSpot gold closed Friday at $4,378.39, up 0.84% on the day and about 0.8% for the week — its first weekly gain in four weeks — with the intraday high of $4,399.67 leaving it 33 cents shy of the $4,400 line. Gold ETFs have now logged eight straight sessions of inflows, but with the 10-year back above 5% and the dollar index near 100, here is what decides whether this is a reversal or a bounce.
Author  Suzie
Sep 20, Sun
Spot gold closed Friday at $4,378.39, up 0.84% on the day and about 0.8% for the week — its first weekly gain in four weeks — with the intraday high of $4,399.67 leaving it 33 cents shy of the $4,400 line. Gold ETFs have now logged eight straight sessions of inflows, but with the 10-year back above 5% and the dollar index near 100, here is what decides whether this is a reversal or a bounce.
placeholder
October hike odds climb toward 60% as Goldman and BofA both flip — what Warsh's "dose of accommodation" really changedRate futures now price roughly 55% to 62% for a 25bp hike at the October 27-28 FOMC, up from about 30% before Chair Warsh's post-meeting framing that the Fed is merely "removing some accommodation." Goldman Sachs has added an October hike to its forecast and Bank of America now sees moves in both October and December. Here is the repricing, the language behind it, and the two data points that decide it.
Author  Irene Q.
Yesterday 06: 22
Rate futures now price roughly 55% to 62% for a 25bp hike at the October 27-28 FOMC, up from about 30% before Chair Warsh's post-meeting framing that the Fed is merely "removing some accommodation." Goldman Sachs has added an October hike to its forecast and Bank of America now sees moves in both October and December. Here is the repricing, the language behind it, and the two data points that decide it.
placeholder
Memory chips surge, Nasdaq notches a second straight record close — why the Dow fell 185 points anywayMicron gained 5%, SanDisk 6.8%, Seagate 4% and Western Digital 3% as the memory complex led the Nasdaq Composite to a second consecutive record close of 27,244.28. But the Dow fell 185 points as JPMorgan, Wells Fargo and Schwab slid more than 3% each — a split tape that says more about positioning than about the economy.
Author  Irene Q.
Yesterday 06: 51
Micron gained 5%, SanDisk 6.8%, Seagate 4% and Western Digital 3% as the memory complex led the Nasdaq Composite to a second consecutive record close of 27,244.28. But the Dow fell 185 points as JPMorgan, Wells Fargo and Schwab slid more than 3% each — a split tape that says more about positioning than about the economy.
placeholder
Gold Price Forecast: XAU/USD drifts toward $4.300 with bears gaining tractionGold (XAU/USD) retraces Tuesday’s gains on Wednesday and drifts lower, approaching the $4,300 area as the US Dollar Index (DXY) rallies further amid high US Treasury yields.
Author  FXStreet
Yesterday 10: 02
Gold (XAU/USD) retraces Tuesday’s gains on Wednesday and drifts lower, approaching the $4,300 area as the US Dollar Index (DXY) rallies further amid high US Treasury yields.
placeholder
US input costs rose at the fastest pace in four years — the September flash PMI beat is an inflation story, not a growth storyUS September flash PMIs came in far above expectations, with the composite at 58.4, a five-year high. But the detail that moved markets was input cost inflation at its fastest since October 2022, driven by fuel, transport and supply shortages. Brent is back above $100 and the 10-year Treasury yield has hit its highest since 2007.
Author  Suzie
7 hours ago
US September flash PMIs came in far above expectations, with the composite at 58.4, a five-year high. But the detail that moved markets was input cost inflation at its fastest since October 2022, driven by fuel, transport and supply shortages. Brent is back above $100 and the 10-year Treasury yield has hit its highest since 2007.
Related Instrument
goTop
quote