- Mexican Peso weakened more than 0.50% late in the New York session.
- Mexico’s currency at the mercy of US Dollar dynamics amid a light economic calendar.
- CME FedWatch Tool indicates a 46% probability of a 25 bps rate hike by the Fed in December.
Mexican Peso (MXN) is losing some ground on Tuesday against the Greenback (USD) after a positive Retail Sales report from the United States (US), which sparked a repricing for another rate hike by the US Federal Reserve (Fed) on the December meeting, according to the CME FedWatch Tool. Therefore, US Treasury bond yields are rising, lifting the USD/MXN towards 18.00, registering gains of 0.75%.
The US Bureau of Economic Analysis (BEA) upward revised Retail Sales for August in the US while revealing September’s data, which came a tick lower than the prior month but exceeded forecasts. Later, the Fed revealed that Industrial Production advanced. Regarding monetary policy expectations, the CME FedWatch Tool shows traders speculating the Fed would skip November’s meeting, but December is open, with odds for a 25 bps hike standing at around 46%.
Aside from this, risk appetite improved on news of US President Joe Biden’s travel to Israel, where he would meet Israel’s PM and Arab leaders.
Daily Digest Market Movers: Mexican Peso depreciates as the USD/MXN oscillates above/below 18.00
- US Retail Sales in September grew by 0.7% MoM, above forecasts of 0.3%, but trailed upward revised August of 0.8%.
- Industrial Production rose 0.3% MoM, better than expected, and the previous month’s 0.0% reading.
- Mexico’s 2023 GDP is expected to hit 3.2%, according to the World Bank and the International Monetary Fund.
- New York Fed Empire State Manufacturing Index for October plunged to -4.6, higher than forecasts of -7 but worse than September’s 1.9 expansion.
- Philadelphia Fed President Patrick Harker commented the current level of rates kept house buyers on the sideline, highlighting that the Fed is likely done hiking rates.
- Chicago Fed President Austan Goolsbee said the fall in US inflation is not a bleep, according to the Financial Times.
- Inflation expectations for one year rose from 3.2% to 3.8%, while for five years jumped to 3% from 2.8%.
- 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.
- 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 drops as technical signs support a USD/MXN bullish bias
The Mexican Peso is trimming some of its Monday gains, but it remains below the 18.00 figure, maintaining its upward bias, unless the USD/MXN drops below the 200-day Simple Moving Average (SMA) at 17.75. In that case, the exotic pair could aim towards 17.50, followed by the 50-day SMA at 17.35. Contrarily, if the pair could re-test the 18.00 figure, which once broke, the pair could rally and test 18.20. Next resistance would be the October 6 high of 18.48.
Risk sentiment FAQs
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.
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.
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.
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.
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