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Mexican Peso rises after mixed US data, Fed’s decision

  • Mexican Peso appreciates against the Dollar, driven by the recent Fed decision and softer US employment figures.
  • Banxico’s survey indicates expectations of a rate cut to 9.25% and a year-end exchange rate forecast of 18.50, influencing market sentiment.
  • Mexico’s manufacturing sector shows expansion with a slowdown, contrasting with US data that points to a cooling labor market but increasing manufacturing activity.

The Mexican Peso (MXN) climbed against the US Dollar (USD) on Thursday as market participants digested the latest Federal Reserve (Fed) decision. Alongside that, softer employment figures in the United States (US) and a risk-on impulse favor the emerging market currency. The USD/MXN trades at 17.08, down by 0.76%.

The Bank of Mexico (Banxico) revealed its survey of expectations on Thursday, showing that analysts estimate the bank will lower rates to 9.25% and expect the exchange rate to end at 18.50. In regard to inflation expectations, private analysts estimate it to hit 4.17% and economic growth to range from 2.29% to 2.40%.

Meanwhile, Mexico’s economic docket featuring that business activity in the manufacturing sector expanded, but it’s slowing down. In the meantime, US economic data showed the labor market is cooling while manufacturing activity gathers steam.

Daily digest market movers: Mexican Peso appreciates as US Dollar weakens on mixed US data

  • S&P Global revealed that manufacturing activity in Mexico is slowing sharply, with the PMI dipping from 52.0 in December to 50.2.
  • US Initial Jobless Claims for the last week rose 224K, exceeding the previous reading of 215K and forecasts of 215K. The data suggests the labor market is cooling amid a period in which US companies announced plans to cut over 82,300 jobs in the last month.
  • The S&P Global Manufacturing PMI improved from 47.9 to 50.7 in January. The Institute for Supply Management’s (ISM) Manufacturing PMI improved from 47.1 to 49.1, exceeding forecasts of 47.
  • USD/MXN traders continued to digest the latest Federal Reserve decision to hold rates unchanged as widely expected and adopted a neutral stance. Even though officials had opened the door to cut interest rates, they emphasized the need for reassurance that inflation is “sustainably” moving toward its 2% goal. Regarding the balance sheet, its reduction would continue as outlined in May of 2023.
  • Mexico’s economy grew below forecasts in the last quarter of 2023. GDP expanded 0.1% QoQ, trailing Q3 1.1% growth and forecasts of 0.4%.
  • Given that the Mexican economy remains solid, according to the data revealed in January, the Bank of Mexico (Banxico) could delay easing monetary policy as conditions remain hotter than expected.
  • However, if Banxico’s officials remain determined to begin its easing cycle in Q1 of 2024, that could depreciate the emerging market currency due to the reduction of interest rate differentials. That could also underpin the USD/MXN pair on its way toward the psychological 18.00 figure.
  • Additional factors that might depreciate the Mexican currency are geopolitical risks and risk aversion.

Technical Analysis: Mexican Peso stages a comeback as USD/MXN breaks below 17.15

The USD/MXN remains trading sideways, but it has pierced below the 50-day Simple Moving Average (SMA) at 17.13, exposing the exotic pair to further losses. If sellers reclaim the January 22 daily low of 17.05, that could open the door to challenging the 17.00 figure.

On the flip side, if buyers reclaim the 50-day SMA at 17.13, that could exacerbate a rally to 17.20. Once that level is cleared, the next resistance would be the 200-day SMA at 17.33, followed by the 100-day SMA at 17.38.

USD/MXN Price Action – Daily Chart

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.

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