Mexican Peso recovers territory ahead of Banxico interest rate decision

• The Mexican Peso recovers some ground despite a risk-off impulse, with traders eyeing Banxico’s decision.
• The economy in Mexico remains resilient, though the recent economic budget for 2024 could undermine the MXN.
•  Nearshoring and interest rate differentials between Mexico and the US, favors USD/MXN downside.

The Mexican Peso (MXN) is recovering early in the North American session after losing nearly 3.50% in the week due to risk aversion and the Federal Reserve's (Fed) hawkish rhetoric, as most officials expect another rate hike for 2023. The emerging market currency hit a four-month low at 17.8161 against the Greenback (USD) on Wednesday. Still, the looming central Bank of Mexico (Banxico) decision boosted Mexico’s currency, a headwind for the USD/MXN pair.

The latest economic data revealed the Mexican economy remains robust, benefiting from nearshoring opportunities after the COVID-19 pandemic. It should be said the country’s inflation remains “stable” thought in the upper band of Banxico's goal of 3% plus or minus 1%, at around 4.64% YoY in August. Nevertheless, the recent economic budget for 2024 raises analysts' eyebrows, as it projects an increase in the deficit to 4.9%. Speculations grow around the Mexican central bank's opinion and measures to consider the proposed budget.

Daily Digest Market Movers: Mexican Peso halts its slide on US Dollar correction

• The Mexican Peso recovered some ground after depreciating to levels last seen in late May 2023 and approached the 200-day Simple Moving Average (SMA) at 17.88411 on risk aversion.
• The Bank of Mexico is expected to keep its monetary policy restrictive and hold rates unchanged at 11.25%.
• September’s first-half inflation report in Mexico was 4.44%, down from 4.64% in August, according to the National Statistics Agency, INEGI.
• Being an emerging market currency, the Mexican Peso weakens on risk aversion. Therefore, news emerging of a possible US government shutdown triggered a flow toward safe-haven assets, weakening the Mexican Peso.
• The drop in Oil prices weakens the Mexican currency, as its economy relies on crude exports.
• Moody’s rating agency warned the fiscal strategy of the Mexican government in 2024 must be credible after the June elections in defining the country’s stable outlook.
• In July, Moody lowered Mexico's rating to “Baa2” with a “stable” outlook but warned of fiscal pressures for the next government due to the 2024 economic budget.
• US Treasury bond yields jumped after September’s Federal Reserve Open Market Committee (FOMC) decision to hold rates unchanged. However, the dot plots above 5% in 2024 confirmed the Federal Reserve’s higher-for-longer mantra.
• Recent US Dollar strength weighed on the Mexican currency after printing multi-month highs.

Technical Analysis: Mexican Peso

The Mexican Peso found its foot after depreciating to 17.8161 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.8410, though it is staging a comeback and trimming some of its losses, currently below the 17.6000 area. Nevertheless, further upside is expected after printing a new cycle high, while the 50-day SMA reduces the distance to the 100-day SMA. Near-term, actual price action could be seen as a pullback, as the Relative Strength Index (RSI) aims lower, though the uptrend remains intact.