• Mexican Peso drops for a second consecutive day, falling 1.64% against a robust US Dollar buoyed by risk aversion and a less dovish Fed outlook.
• USD/MXN pair approaches the critical 50-day SMA as risk aversion hits Wall Street in exchange for US Dollar safety.
• Fed Governor Waller's latest remarks hint at the possibility of easing monetary policy, though it would be slower than investors’ expectations.

The Mexican Peso posts back-to-back days with losses and plummets sharply against the US Dollar (USD), which benefits from risk aversion, and traders pricing in a less dovish Federal Reserve (Fed), according to Chicago Board of Trade (CBOT) data. That, alongside a jump in US Treasury bond yields, has sponsored the USD/MXN with a substantial leg up, trading at 17.13 or 1.51% higher.

Market sentiment remained sour on Tuesday as Wall Street resumed trading and began a short week in the red as market participants came back from a holiday. Traders in the futures market trimmed bets that the Fed would cut rates aggressively, bolstering the Greenback as the US Dollar Index (DXY) rises 0.60% to 103.29. Consequently, the USD/MXN pair edged toward the 50-day Simple Moving Average (SMA) near 17.18, with buyers threatening to reclaim that level, posing their eyes on the confluence of the 100 and 200-day SMAs.

In the meantime, Fed Governor Christopher Waller is crossing the newswires, saying that data could “allow” the Fed to consider easing monetary policy.

Daily digest market movers: Mexican Peso tumbles as Fed’s Waller supports cuts if inflation stays low

• Fed’s Waller added that policy could be adjusted as long as inflation doesn’t rebound or stay high and emphasized the Fed could cut rates by 75 basis points in 2024. He added rate cuts should be made methodically, adding that there’s no reason to cut as quickly as in the past.
• The New York Fed Empire State Manufacturing Index for January declined to -43.7 compared to estimates of -5 and a December reading of -14.5. This sharp slump raises concerns about the potential for a recovery in the manufacturing sector. Furthermore, in the latest month, the ISM Manufacturing PMI continued to indicate a contraction in the sector, marking 14 consecutive months of contractionary readings.
• Mexico’s economic data released in January shows the economy is encountering several challenges. Inflation in the country increased from 4.32% to 4.66% YoY in December, surpassing the projected figure of 4.55%. Additionally, the same report showed that while underlying inflation is trending downward toward 5%, it remains elevated. This persistent high level of underlying inflation could potentially discourage officials at Banxico (the Central Bank of Mexico) from implementing an easing of monetary policy in the first quarter of 2024.
• In addition to that, Industrial Production plunged -1.0% MoM after achieving eight months of expansion, indicating that higher interest rates set by Banxico at 11.25% are beginning to impact the economy.
• In that regard, Auto Production for December slumped from 18.1% to -9.9% YoY.
• Confidence surveys released on January 3 and 8 showed that business confidence remained high at 54.6, bolstered by “nearshoring” prospects. However, consumers have begun to turn pessimistic as they expect inflation and economic deceleration to weigh on their economies.
• The week’s Mexican economic docket will feature Retail Sales for November, expected to remain unchanged at 3.4% YoY, according to the consensus.
• Although December’s meeting minutes from Banxico (the Central Bank of Mexico) suggest that the central bank might contemplate easing its monetary policy, the inflation report for December could hinder any move toward policy relaxation.
• Analysts at Standard Chartered noted, “We expect the policy rate to be lowered to 9.25% by end-2024, although an official downward revision in the output gap could open the door for more aggressive rate cuts.”
• On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.

Technical analysis: Mexican Peso slumps sharply as USD/MXN climbs toward 17.15

The USD/MXN has shifted to a neutral bias as buyers lifted the exchange rate past the 17.00 figure, opening the door to challenge the 50-day SMA at 17.18. A breach of the latter would expose the confluence of the 200 and 100-day SMAs at around 17.38/17.40. Further upside is seen at December’s high of 17.56, followed by the May 23 high of 17.99.

On the contrary, if bears drag prices below 17.00, that could exacerbate a retest of the January 12 low of 16.82, followed by the January 8 low of 16.78. Once those two levels are cleared, the next stop would be the August 28 cycle low of 16.69, ahead of last year’s low of 16.62