Mexican Peso sinks against US Dollar ahead of US Nonfarm Payrolls report
- Mexican Peso reverses its course and registers losses as the USD/MXN breaks above the 100-day Simple Moving Average (SMA).
- Mexico's inflation ticked up in November, which could prevent Banxico from easing policy as soon as they projected.
- US labor market data revealed during the week continued to cool down; USD/MXN traders eye US Nonfarm Payrolls.
Mexican Peso (MXN) nosedives against the US Dollar (USD) late in the New York session, although economic data from Mexico suggests the Bank of Mexico (Banxico) would likely need to keep interest rates higher, not just for “some time,” as the central bank stated in its latest monetary policy statement. Even though that would keep the USD/MXN trading below the 18.00 figure, at the time of writing, the exotic pair is rallying more than 1.20% and trades at 17.50
Mexico's National Statistics Agency (INEGI) revealed that inflation rose in November, though core readings dipped. The USD/MXN has been underpinned by a rise in US Treasury bond yields. However, the Greenback (USD) remains weak, as shown by the US Dollar Index (DXY), which is down 0.49% on the day at 103.65.
In the meantime. USD/MXN traders are eyeing the November US employment report release, known as the Nonfarm Payrolls. Estimates suggest the US economy added 180K jobs while the Unemployment Rate is expected to stay pat at 3.9%. Average Hourly Earnings (YoY) are expected to drop by 4%.
Daily digest market movers: Mexican Peso on the backfoot despite rising inflation in Mexico
- Mexico's Consumer Price Index (CPI) in November rose 4.32% YoY, exceeding September’s 4.26%, though still below the forecast of 4.40%. The Core CPI, usually sought by central banks as a more stable measure of price stability, slowed from 5.5% to 5.30% in the twelve months to November, below forecasts of 5.34%.
- In recent interviews, Banxico's Governor Victoria Rodriguez Ceja and Deputy Governor Jonathan Heath commented that they could ease policy if the disinflation process advances. Contrarily to that, Deputy Governor Irene Espinosa pushed back and said inflationary risks remain and are growing.
- In the US, the labor market continues to cool down due to recently released data. The US Challenger Job Cuts revealed that US employers cut 45.51K jobs, exceeding October’s 36.836K.
- In the same tenor, Initial Jobless Claims for the week ending December 2 came at 220K, below estimates of 222K but above the prior week’s 219K.
- Jobless claims, summed to the latest JOLTs and ADP figures, added to softer inflation readings, led financial markets to conclude the Federal Reserve (Fed) has ended its tightening cycle. Therefore, market participants had already begun to price in more than 100 bps of cuts for 2024
- Money market futures projects the US Federal Reserve would slash rates by 135 basis points toward December 2024.
Technical Analysis: Mexican Peso weakens against the US Dollar as the USD/MXN struggles around the 100-day SMA, key resistance level
The USD/MXN edges up and meanders at around the 100-day SMA at 17.38, which, once cleared, could open the door for a move toward the psychological 17.50 figure. If buyers reclaim the latter, the 200-day SMA at 17.55 will be exposed, followed by the 50-day SMA at 17.67.
Conversely, if USD/MXN remains below the 100-day SMA, the downtrend would remain intact, with the first support level seen at the current week’s low of 17.16. Once cleared, the next demand area would be the 17.00/05 range.
Employment FAQs
How do employment levels affect currencies?
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
Why is wage growth important?
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
How much do central banks care about employment?
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.