Mexican Peso strengthens and trades near four-day lows on sentiment improvement, soft USD

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• Mexican Peso appreciates more than 0.60% but fails to break support at the 20-day SMA.
• Mexico’s economic budget saw increased welfare pensions equivalent to 1.4% of the GDP.
• USD/MXN consolidates in the mid-North American session at around 17.40s.

The Mexican Peso (MXN) remains firm versus the US Dollar (USD) on an improvement in market sentiment and bolstered by the Bank of Mexico (Banxico) maintaining its restrictive stance, with rates above 11%, and disregarded possible rate cuts in 2023. In the mid-North American session, the USD/MXN pair has broken strong support, seen at 17.50, and hovers around the 17.40s area.

The USD/MXN fell to a four-day low of 17.3478 early in the North American session after economic data from the United States (US) portrays inflation is decelerating as revealed by the US Federal Reserve’s (Fed) preferred gauge for inflation, the Core Personal Consumption Expenditure (PCE). Even though Mexico’s growth forecasts were revised to the upside, Mexico’s economic budget for 2024 is still raising some concerns among economists as it seeks to increase the deficit to 4.9. It should be said that the welfare pension for seniors increased seven times the amount in 2018, the equivalent of 1.4% of GDP.

Daily Digest Market Movers: Mexican Peso remains firm, set to finish the week with more than 1% losses

• The Bank of Mexico (Banxico) held rates at 11.25% and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
• Banxico’s Government Board highlighted Mexico’s economic resilience and the strong labor market as the main drivers to keep inflation at the current interest rate level.
• BBVA updated Mexico’s economic growth forecast, seeing the Gross Domestic Product rising to 3.2% from 2.4% in 2023 and 2.6% from 1.8% in 2024.
• Mexico’s Unemployment Rate edged lower from 3.1% in July to 3.0% MoM in August, according to the National Statistics Agency (INEGI).
• September’s first-half inflation report in Mexico was 4.44%, down from 4.64% in August, according to INEGI.
• Being an emerging market currency, the Mexican Peso weakens amid risk aversion. Therefore, news emerging of a possible US Government shutdown triggered a flow toward safe-haven assets, weakening the Mexican Peso.
• The drop in Oil prices weighs on the Mexican currency, as its economy relies on crude exports.
• Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
• In July, Moody’s lowered Mexico’s rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
• USD/MXN extended its losses as US Core PCE fell from 4% to 3.9% YoY in August.
• Broad Greenback weakness undermines the USD/MXN pair, as the US Dollar Index (DXY) drops below 106.00 at around 15:00 GMT.

Technical Analysis: Mexican Peso

The Mexican Peso (MXN) found its foot after depreciating to 17.81 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.84. The USD/MXN is accelerating its downtrend after closing below 17.60, with sellers eyeing a push below the 20-day Simple Moving Average (SMA) at 17.32. If that level is lost, the USD/MXN pair would test the 100-day SMA at 17.18, followed by the 50-day SMA at 17.10. If the exotic pair remains above the September low of 16.99, it could resume the one-month upmove.