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Mexican Peso skyrockets against US Dollar as USD/MXN plunges below key support levels

November 2, 2023| Forex Market


  • Mexican Peso remains firm, posting solid gains as the Greenback remains soft, weighed by falling US bond yields.
  • With USD/MXN dropping below the 200 and 50-day SMA, will the pair turn bearish?
  • Federal Reserve holds rates steady, with Chair Jerome Powell’s remarks perceived as hinting at the end of the rate hike cycle.
  • Money market players estimate the Fed’s first rate cut by June 2024, a headwind for the USD/MXN.

Mexican Peso (MXN) surges against the US Dollar (USD), with the USD/MXN dropping below the important technical 200 and 50-day Simple Moving Averages (SMAs), as market participants speculate the US Federal Reserve (Fed) is done hiking rates after Wednesday’s decision. The fall in Treasury bond yields in the United States (US) dampens appetite for the American Dollar (USD). The USD/MXN pair trades at around 17.52, registering losses of more than 1.30% on the day.

On Wednesday, the Federal Reserve held the target range for federal funds rate steady at 5.25%-5.50% without changing the tone of the monetary policy statement. After that, Fed Chair Jerome Powell struck the markets with some hawkish remarks, although adding that “we have come very far with this rate-hike cycle and are close to end of the cycle.”.

Regarding the latter, money market players are indeed pricing in the Fed is done raising rates, with December odds of keeping rates on hold at 80%, as traders expect the first rate cut in June 2024. The odds for a 25 bps cut are at 67.80%.

Thursday’s data revealed the Fed’s decision to pause was justified as unemployment claims for the last week rose above estimates and the prior week’s data, extending the uptrend to six straight weeks, while Unit Labor Costs unexpectedly declined in the third quarter. On the other hand, Factory Orders jumped above August’s and forecasts by analysts, as the US economy continues to show resilience and keeps growing above trend.

Nevertheless, market participants’ focus would shift towards the US Nonfarm Payrolls report for October, which is expected to show the economy added just 180K jobs with the Unemployment Rate foreseen at 3.8%. Due to the extension of the Greenback’s losses, a better-than-expected jobs report could rock the boat sharply and catch traders off guard.

On the Mexican front, the economic docket featured the release of Foreign Exchange Reserves. The Bank of Mexico – also known as Banxico –reported that “reserves in Mexico decreased to 209,626 USD Million in September from 210,385 USD Million in August of 2023.”

Daily digest movers: Mexican Peso climbs sharply on Fed’s dovish hold

  • US Initial Jobless Claims for the week ending October 28 rose by 217K, exceeding estimates and the previous week’s figures at 210K and 212K, respectively.
  • Factory Orders in September grew surprisingly, coming at 2.8% MoM, above forecasts of 2.3% and August 1%.
  • US ADP Employment Change in October climbed to 113K, better than the previous month, but missed forecasts of 150K.
  • The ISM Manufacturing PMI dropped to contractory territory at 46.7 in October, below forecasts and September’s 49 reading.
  • September’s JOLTs job report showed openings rose by 9.553 million, above forecasts of 9.25 million, and August’s 9.497 million.
  • Mexico S&P Global October Manufacturing PMI at 52.1, above September’s 49.8.
  • Mexico’s Gross Domestic Product grew by 0.9% QoQ in the third quarter on its preliminary reading, above the previous quarter and estimates of 0.8%.
  • On a yearly basis, Mexico’s GDP for Q3 expanded by 3.3%, above forecasts of 3.2% but trailing the previous 3.6%.
  • According to Enki Research, a firm specializing in natural disasters, the first estimates of Hurricane Otis’s damages in Mexico are around $10 to 15 billion.
  • On October 24, Mexico’s National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September, below forecasts of 4.38%.
  • Mexico’s core inflation rate YoY was 5.54%, beneath forecasts of 5.60%.
  • The Bank of Mexico (Banxico) held rates at 11.25% in September and revised its inflation projections from 3.50% to 3.87% for 2024, above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9.

Technical Analysis: Mexican Peso buyers conquered the 200 and 50-day Simple Moving Average, USD/MXN eyes 17.50

The USD/MXN finally plunged below the 200-day Simple Moving Average (SMA) at 17.70, extending its losses past the 50-day SMA at 17.61. A daily close below those two crucial support levels, and the pair could prolong its slide towards the September 29 daily low at 17.34.

On the other hand, if USD/MXN buyers stepped in and reclaimed the 200-day SMA, that could open the door to recovering the psychological 18.00 figure. A breach of the latter could expose a rally to the 20-day SMA at 18.06 before targeting the October 26 high at 18.42 before challenging last week’s high at 18.46, ahead of the 18.50 figure.

Employment FAQs

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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