- Mexican Peso stages a comeback as the USD/MXN breaks key support at the 100-day SMA, eyeing 17.00.
- Mexico’s Consumer Confidence has improved the most since 2019.
- US ADP Employment Change was softer than expected, weighed on the US Dollar.
Mexican Peso (MXN) gains traction against the US Dollar (USD) as the soft-landing narrative takes place in the financial markets. Expectations for rate cuts by major central banks next year sent global bond yields into a tailspin, while the Greenback (USD) remains firm. Nevertheless, the USD/MXN is trading at 17.25 below its 100-day Simple Moving Average (SMA), posting daily losses of 0.74%.
Mexico’s economic docket revealed Consumer Confidence data, which failed to gain traders’ attention, and remained focused on the release of further economic data from the United States (US) ahead of Friday’s November Nonfarm Payrolls (NFP) report. In the meantime, expectations of rate cuts by the Federal Reserve (Fed) remain above 100 basis points for the next year, a reason behind the USD/MXN’s drop.
Daily digest movers: Mexican Peso continues to strengthen amid growing confidence in Mexican households
- Consumer confidence in Mexico improved to 47.3, seasonally adjusted, exceeding October’s 46.2 reading, its highest level since February 2019.
- Mexico’s economic calendar will feature the release of November’s Consumer Price Index (CPI), on Thursday, expected to show a slight climb compared to October’s readings.
- A Reuters poll revealed economists see headline inflation up in November, while core CPI is expected to slow.
- Across the border, Automatic Data Processing (ADP) and the Stanford Digital Lab revealed the US ADP Employment Change report, which shows companies hiring in the US and is seen as a prelude to Nonfarm Payrolls. November’s ADP Employment report showed that 103,000 jobs were added to the economy, below forecasts of 130,000, and trailed downward revised data from October at 106,000.
- Further data showed the US Trade deficit widened more than projected in October due to a decline in exports. The trade deficit was expected at $64.2 billion, and it came to $64.3 billion, spurred by exports of goods and services dropping 1%, while imports rose by 0.2%.
- Meanwhile, October’s JOLTs report showed the labor market is cooling. Jobs data, alongside a decline in the US Federal Reserve’s (Fed) preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, have been two of the reasons why market participants are expecting more than 100 basis points of rate cuts by the Fed.
Technical Analysis: Mexican Peso regains control as the USD/MXN extends its losses under the 100-day SMA
The USD/MXN is reversing its previous course, and dropped below the 100-day SMA at 17.38, extending its losses below the 17.30 figure. A daily close below that level would cement its bearish bias. In that outcome, the pair’s first support would be the current week’s low 17.16, followed by strong support found at 17.05. Once taken out, the 17.00 figure would be up for grabs.
On the other hand, if USD/MXN climbs past the 100-day SMA, that would pave the way to test at 17.50 and the 200-day SMA at 17.55. A breach of those two levels could open the door to testing he 50-day SMA at 17.68.
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.