Market Data 
- Mexican Peso on the backfoot following last week near 4% appreciation.
- President AMLO signs the judicial reform into law, officially enacted as of Sunday.
- Fed rate cut expectations rise, with a 61% chance of a 50 bps cut on Wednesday, as investors await key US Retail Sales data.
The Mexican Peso retreats moderately against the Greenback during Monday’s session amid thin trading due to Mexico’s closed local markets in observance of Independence Day. At the time of writing, the USD/MXN trades at 19.24, with gains of 0.35%.
The stock market mood is mixed on Wall Street and weighed on the Mexican currency, which appreciated close to 4% last week. A light economic docket in Mexico will feature the release of Aggregate Demand and Private Spending data for the second quarter of 2024 on Wednesday.
In the meantime, President Andres Manuel Lopez Obrador (AMLO) signed into law the Judicial reform, “took effect on Sunday after the text of the constitutional changes was published in the government gazette,” according to Reuters.
Across the north of the border, the US Dollar remains weak as investors brace for the first Federal Reserve (Fed) interest rate cut on Wednesday. Expectations that the Fed would go big with its first rate cut grew during Monday’s session after a news article of Fed whisperer Nick Timiraous hinted at the Fed’s dilemma of starting big or small.
Data from the CME FedWatch Tool shows odds for a 50-basis-point (bps) cut are at 61%, while for a 25 bps, they diminished from 50% last Friday to 39%.
Ahead of the week, the US economic schedule will feature August Retail Sales on Tuesday, which are expected to dip compared to July’s strong figures. This and housing data will be announced before the Fed’s decision and Chair Jerome Powell’s press conference.
Daily digest market movers: Mexican Peso weakens on Independence Day
- USD/MXN would continue to be driven by market mood and expectations for a bigger Fed rate cut.
- Mexico’s Inflation dipped below 5% in August, increasing the chances of additional easing by Banxico.
- Bank of Mexico Director of Economic Research, Alejandria Salcedo, said that a robust rule of law environment could generate conditions that encourage investment.
- Wall Street economists estimate that US Retail Sales will dip from 1% to 0.2% MoM.
- US Industrial Production is foreseen improving from July’s -0.6% contraction to 0%.
- Data from the Chicago Board of Trade suggests the Fed will cut at least 112 basis points this year, according to the fed funds rate futures contract for December 2024.
USD/MXN technical outlook: Mexican Peso drops as USD/MXN rises above 19.20
The USD/MXN pullback pushed the pair toward 19.15 before dip buyers emerged and pushed the spot price toward 19.38 before retreating somewhat. Momentum hints that sellers are in charge, but the Relative Strength Index (RSI) about to cross above its neutral line, could pave the way for a leg-up.
In that event, the USD/MXN’s next resistance level would be 19.50. On further strength, the next ceiling would be 20.00. Conversely, if USD/MXN extends its losses past 19.15, the 19.02 August 23 low will be within reach. A breach of the latter will expose the 50-day Simple Moving Average (SMA) at 18.99, followed by the August 19 cycle low of 18.59.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
