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Mexican Peso surrenders as Fed Chair Powell adopts tougher tone amid global tensions

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FXStreet in Market News 12 384567
April 17, 2024 04:05

content provided with permission by FXStreet

  • Mexican Peso depreciates more than 1.8%, driven by Middle East tensions and robust US economic data.
  • The IMF cuts Mexico’s growth forecast, expecting tighter fiscal policies ahead.
  • Mexico aims to reduce its fiscal deficit by half through major spending cuts, potentially dampening growth.
  • Market eyes upcoming Mexico’s Retail Sales data and comments from Fed Chair Powell.

The Mexican Peso trips down and plunges more than 1.8% against the US Dollar on Tuesday, courtesy of risk aversion. An escalation of Middle East conflict looms, along with solid economic data from the United States (US) and overall US Dollar strength. The USD/MXN trades at 17.04, bouncing off daily lows of 16.68.

Recently, the Federal Reserve Chair Jerome Powell commented that the US economy has performed quite strongly while acknowledging that recent data shows a lack of further progress on inflation. That triggered a leg-up in the USD/MXN, while futures traders see 35 basis points of rate cuts by the Fed in 2024.

Mexico’s economic docket remains absent, with the next significant data release being March Retail Sales, scheduled for April 19, 2024. In the meantime, the International Monetary Fund (IMF) downwardly revised economic growth in Mexico from 2.7% to 2.4% in 2024 and from 1.5% to 1.4% in 2025.

The IMF reduced its 2025 forecast, arguing that the fiscal expansion that will drive progress this year will be reversed in the next year because the new administration will have to tighten its belt, reversing existing spending policy.

In that regard, Mexico’s Ministry of Finance expects the fiscal deficit to decrease from 5% to 2.5% of the Gross Domestic Product (GDP) next year, which would imply a cut in spending of 833.6 billion Pesos, according to the Pre-General Policy Criteria Economic 2025.

Across the border, US economic data was mixed, with housing figures missing estimates, while Industrial Production stood pat. Traders are bracing for Federal Reserve (Fed) Chair Jerome Powell’s speech at 17:15 GMT.

Daily digest market movers: Mexican Peso loses traction on risk aversion

  • March’s Building Permits in the US decreased by 4.3%, dipping to 1.458 million, less than the 1.514 million estimates and February’s 1.523 million. Consequently, Housing Starts plunged 14.7%, from 1.549 million to 1.321 million, below forecasts of 1.48 million.
  • The Fed revealed that March’s Industrial Production was aligned with estimates and the previous reading of 0.4% MoM.
  • Despite posting mixed data, traders continue to digest the strong March US Retail Sales report revealed on Monday. This report was highlighted by the behavior displayed by the control group—used to calculate the GDP—crushing estimates and the previous month’s reading.
  • Retail Sales in the control group jumped from 0.3% in February to 1.1% MoM in March, surpassing forecasts of a 0.4% expansion.
  • Geopolitical tensions in the Middle East would likely weigh on the Mexican currency.  USD/MXN traders must be aware that any escalation could prompt traders to ditch the Mexican Peso and buy US Dollars.
  • US Treasury yields surged more than 10 basis points (bps) in the belly and long end of the yield curve. That underpins the Greenback, which is up a modest 0.09% at 106.17 on the DXY.
  • Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 4.97%.

Technical analysis: Mexican Peso depreciates sharply, USD/MXN pierces 17.00

The USD/MXN daily chart shows that the pair has shifted to a neutral/upward bias as the Mexican currency tumbles and depreciates past the 17.00 figure. On its way north, the pair has broken key resistance levels. These include the 50 and 100-day moving averages (DMAs), each at 16.81 and 17.03, which could pave the way for further upside.

The next resistance would be the 200-DMA at 17.16. Once cleared, that could pave the way to challenging the January 17 high at 17.38 before testing the 17.50 psychological level. On the other hand, if USD/MXN slides below 17.00, look for a pullback toward last year’s low of 16.62, followed by the April 12 low of 16.40.

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.