Mexican Peso suffers solid losses amid Fed’s hike speculations, despite hawkish Banxico minutes
- Mexican Peso slid more than 0.75%, as the USD/MXN rose to 17.97.
- Economic data from the United States spurred risk-aversion in the Forex markets hence, the USD/MXN rallied.
- Mexico’s Industrial Production remained upbeat, while Banxico’s hawkish minutes could boost the Mexican Peso.
Mexican Peso (MXN) finished Thursday’s session with losses against the US Dollar (USD) after a tranche of economic data from the United States (US) reignited concerns amongst investors that additional increases to the Federal Fund Rates (FFR) are needed to curb stickier inflation. Mexico’s central bank, also known as Banxico, revealed hawkish monetary policy minutes, stopping the USD/MXN from achieving a daily close above 18.00.
Thursday’s developments drove the USD/MXN towards the 17.90 area after the US Bureau of Labor Statistics (BLS) revealed that headline inflation rose above estimates while underlying consumer prices slowed as expected. Further data from the US showed that unemployment claims expanded faster, though they came below estimates. US Treasury bond yields rose on the data release, as did the US Dollar. Recently, Banxico’s monetary policy minutes portrayed the bank as hawkish, as their members do not foresee a rate cut in the near term. Most members emphasized that rates need to be higher for longer, mentioning elevated prices in the services segment as the main reason behind inflation data.
Daily Digest Market Movers: Mexican Peso shifts soft on Thursday, and the USD/MXN trades around 17.97
- Mexico's Industrial Production (IP) for August improved by 5.2% YoY, exceeding forecasts of 4.6% and July’s 4.8% increase.
- Monthly, IP in Mexico rose 0.3% as expected but trailed the previous 0.5% reading.
- The US Consumer Price Index increased 3.7% YoY in September, unchanged from August but above forecasts of 3.6%.
- US core CPI dipped as expected to 4.1% from 4.3% in August.
- Initial Jobless Claims in the US for the week ending October 7 came at 209K, below forecasts of 210K.
- The CME Group FedWatch Tool shows expectations for a 25 bps rate hike in December 2023 rose from 26.3% a day ago to 35.7%.
- The September US Producer Price Index (PPI) rose by 0.5% MoM, above estimates of 0.4%, while the core PPI expanded by 0.3%, exceeding forecasts of 0.2%.
- On an annual basis, the PPI rose by 2.2%, above forecasts and August’s figures of 1.6% and 2%, respectively. The core PPI rate was 2.7%, exceeding projections and the prior month’s data.
- Mexico’s Consumer Price Index (CPI) grew by 4.45% YoY in September, slightly below the 4.47% estimated.
- The core CPI inflation in Mexico stood at a stickier 5.76% YoY, as widely estimated, but has broken below the 6% threshold.
- The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.5% to 3.87% for 2024, above the central bank’s 3% target (plus or minus 1%).
Technical Analysis: Mexican Peso to continue to weaken as USD/MXN buyers eye 18.00
The Mexican Peso depreciated after testing the 200-day Simple Moving Average (SMA) at 17.76, with the USD/MXN pair reaching a weekly low of 17.75. Still, it bounced on the release of US inflation data, towards 17.97, shy of reclaiming 18.00. If the exotic pair achieves a daily close above 18.00, that will form a ‘bullish engulfing’ candlestick pattern, comprised of the price action of Wednesday and Thursday, and could pave the way for further upside. If achieved, the next resistance would be 18.48. Conversely, failure to do it would expose the USD/MXN to selling pressure and challenge the 200-day SMA at 17.76 before testing the 20-day SMA at 17.61.
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
What are the key assets to track to understand risk sentiment dynamics?
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
Which currencies strengthen when sentiment is "risk-on"?
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
Which currencies strengthen when sentiment is "risk-off"?
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.