- The Mexican peso strengthens as US nonfarm payrolls expand by only 150,000, missing the forecast of 180,000.
- The weak US jobs report is fueling speculation of multiple Fed rate cuts in 2024, futures indicated.
- USD/MXN reacts to a cooling US labor market, with the peso hitting a two-month high and the US dollar index falling.
The Mexican peso (MXN) extended its gains against the US dollar (USD) in early trading during the North American session following the jobs report in United States (US) surprisingly misses estimates, showing a further cooling labor market. Traders are now discounting the chances of the Federal Reserve (Fed) raising interest rates, speculating instead that the Fed could cut rates four times in 2024, according to money market futures. As a result, USD/MXN is down over 0.50% on the day, trading at 17.40.
Before Wall Street opened, the US Bureau of Labor Statistics (BLS) revealed non-farm payrolls rose 150,000 in October, below estimates of 180,000 and 140,000 fewer jobs than the previous month. Other data showed the jobless rate rose above estimates, while average hourly earnings rose compared with analysts’ projections but were below September’s figures.
The data comes after the chairman of the Federal Reserve System Jerome Powell and Co. opted to keep the federal funds rate in the 5.25% – 5.50% range for the second consecutive meeting and failed to hit the hawkish report. This could see a reaction from market players that sent US stocks higher, the US dollar lower and US bond yields lower.
USD/MXN fell after the data fell to a two-month low of 17.28, while US bond yields, specifically the benchmark 10-year Note, fell 17 basis points to 4.48% before paring some of their losses. American dollar (USD), measured US dollar indexdown 0.81% to 105.29.
Recently, the Institute of Supply Management (ISM) revealed that the non-manufacturing PMI expanded at a pace of 51.8, indicating that business activity is cooling compared to last month and market players’ forecasts.
Meanwhile, Mexico’s economic calendar revealed that gross fixed investment on a monthly and annual basis was better than expected in August compared to the previous month’s data.
It should be noted that traders should be aware of geopolitical issues after the leader of Hezbollah said that “further escalation on the Lebanese front is a real possibility”.
Daily Overview Moves: Mexican peso surges more than 2.70% on the week against the US dollar
- U.S. nonfarm payrolls rose 150,000 in October, below estimates of 180,000 and lagging behind September’s 297,000.
- The US unemployment rate jumped above estimates from 3.8% to 3.9%.
- Average hourly earnings decreased from 4.3% to 4.1%, but rose from projections of 4.0%.
- The ISM Non-Manufacturing PMI slowed to 51.8 from 53.6, missing expectations for a slowdown of 53.
- Mexico’s gross fixed investment rose 3.1% month-on-month in August, compared with a 0.5% expansion in July. It grew by 32.0% year-on-year, which is more than in the previous month by 28.2%.
- US initial jobless claims for the week ended October 28 rose by 217,000, beating estimates and data from the previous week of 210,000 and 212,000 respectively.
- The ISM Manufacturing PMI fell into contraction territory in October to 46.7, below forecasts and from September’s 49.
- Mexico S&P Global October Manufacturing PMI came in at 52.1, above September’s 49.8.
- Mexico’s gross domestic product (GDP) rose 0.9% quarter-on-quarter in the third quarter from a preliminary reading, above the previous quarter and estimates of 0.8%.
- On an annualized basis, Mexico’s Q3 GDP rose 3.3%, above forecasts of 3.2% but behind the previous 3.6%.
- According to Enki Research, a firm that specializes in natural disasters, initial estimates of damage caused by Hurricane Otis in Mexico are around $10 billion to $15 billion.
- On October 24, Mexico’s national statistics office, INEGI, reported that headline annual inflation reached 4.27%, down from 4.45% at the end of September, below the forecast of 4.38%.
- Mexico’s annual core inflation rate was 5.54%, below the forecast of 5.60%.
- The Central Bank of Mexico (Banxico) left rates at 11.25% in September and revised its inflation projections for 2024 from 3.50% to 3.87%, above the central bank’s target of 3.00% (plus or minus 1%) . The next decision will be announced on November 9.
Technical Analysis: Mexican peso buyers regain control as USD/MXN hovers around 100-day SMA
USD/MXN finally broke below the 200-day simple moving average (SMA) at 17.70 and extended its losses past the 50-day SMA at 17.61. As a result, the pair closed below these two crucial support levels on Thursday and extended its decline below the daily low of 29 September at 17.34, followed by a breach of the 100-day SMA at 17.30 to print a daily low of 17.28. A daily close below the 100-day SMA would reveal the psychological value of 17.00, followed by the August 28 low of 16.69.
On the other hand, if USD/MXN buyers step in and retake the 50-day SMA, this could create a two-candlestick “bull piercing” pattern that could open the door to a rally above the 200-day SMA at 17.70. .
Frequently asked questions about Banxico
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican peso (MXN), and to determine monetary policy. To this end, its main objective is to keep inflation low and stable within target levels – at or near its 3% target, which is the middle of the tolerance band between 2% and 4%.
Banxico’s main tool for managing monetary policy is setting interest rates. When inflation is above target, the bank tries to tame it by raising rates, making it more expensive for households and businesses to borrow money, thus cooling the economy. Higher interest rates are generally positive for the Mexican peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the MXN. A key factor is the rate differential against the USD, or how Banxico is expected to set interest rates relative to the US Federal Reserve (Fed).
Banxico meets eight times a year and its monetary policy is largely influenced by the decisions of the US central bank (Fed). Therefore, the central bank’s decision-making committee usually meets a week after the Fed. At the same time, Banxico responds to and sometimes anticipates monetary policy measures set by the Federal Reserve System. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico was the first to do so in an attempt to reduce the chances of a substantial weakening of the Mexican peso (MXN) and prevent capital outflows that could destabilize the country.