Mexican Peso Gains Momentum, While Dollar Strengthens and US Yields Fall

  • The Mexican Peso extends its gains for the second day in a row, while the USD/MXN pair falls below 18.10 despite the sour market mood.
  • Mexico’s economic activity exceeded estimates in August, providing a positive backdrop for the Peso.
  • The 10-year US bond yield falls above 5%, weakening the Dollar.

He Mexican peso (MXN) rebounds strongly against US dollar (USD) during the North American mid-session, despite the fact that the conflict in the Middle East threatens to involve more actors, which could trigger a risk aversion impulse. This would trigger a flight towards safe haven assets, to the detriment of the peso. The 10-year bond yield in the United States (US) exceeded the 5% threshold, although it has fallen, weighing on the Dollar. The USD/MXN pair is trading at 18.08, down 0.76% on the day.

Mexico’s economic calendar revealed that economic activity exceeded estimates in August, according to the National Institute of Statistics (INEGI). The economy grew above estimates in monthly and annual figures. The drop in the US 10-year bond yield from around 5.02% to 4.86% weighed on the Dollar, opening the door to further losses for the USD/MXN. In the United States, the Chicago Fed’s national activity index rose to 0.2 in September, after a drop of -0.22 in August.

Separately, US troops reported drone strikes in Syria, although no injuries were reported. Geopolitics are likely to continue to dictate financial markets.

Daily summary of movements in the Markets: The Mexican Peso defends itself and pushes the pair below 18.20

  • The Global Index of Economic Activity in Mexico grew 0.4% in August, exceeding the estimate of 0.3%.
  • In annual terms, Mexican economic activity grew by 3.7%, exceeding forecasts of 3.4%.
  • Mexico’s retail sales in August fell 0.4% month-on-month, beating estimates of no change, while they expanded 3.2% annually. This figure was below forecasts of 4.4% and was lower than the 5.1% growth in July.
  • Earlier this month, data showed that Mexico’s Consumer Price Index (CPI) grew 4.45% year-on-year in September, slightly below the 4.47% estimate.
  • Core CPI inflation in Mexico stood at 5.76% year-on-year, as generally estimated, but has broken the 6.00% threshold.
  • The Bank of Mexico (Banxico) kept rates at 11.25% in September and revised its inflation forecasts from 3.50% to 3.87% for 2024, above the central bank’s target of 3.00% (plus or minus 1%).

Technical Analysis: Mexican Peso Gains Momentum as USD/MXN Buyers Anticipate a Pullback

The USD/MXN pair has a bullish bias, although the ongoing pullback was limited before testing the latest cycle high, the October 6 high of 18.48, giving way to a pullback to current exchange rates by below the 18.15 zone. The pair could head towards 18.00 before testing the 20-day SMA at 17.95. A drop below that level could jeopardize the uptrend as the bulls’ last line of defense is likely the 200-day SMA at 17.73.

On the other hand, if the pair points higher and buyers recover 18.48, the figure of 18.50 would be in play, followed by 19.00.

Risk Sentiment FAQ

What do the terms “risk aversion” and “risk sentiment” mean in financial markets?

In the world of financial jargon, the two terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to bear during the reference period. In a market “risk appetite” , investors are optimistic about the future and are more willing to buy risky assets. In a “risk-free” market, investors start to “play it safe” because they are worried about the future and therefore buy assets less risky ones that are more likely to bring benefits, even if they are relatively modest.

What are the key assets to follow to understand risk sentiment dynamics?

Typically, during periods of “risk appetite”, stock markets rise, and most commodities – except gold – also appreciate as they benefit from positive growth prospects. The currencies of countries that are large exporters of raw materials strengthen due to increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds – especially major government bonds – rise, Gold shines and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar benefit.

Which currencies strengthen when the sentiment is “risk appetite”?

The Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and the South African rand (ZAR) tend to rise in markets where there is an “appetite for risk.” This is because the economies of these currencies rely heavily on commodity exports for their growth, and these tend to rise in price during periods of “risk appetite.” This is because investors anticipate higher demand for raw materials in the future due to increased economic activity.

Which currencies strengthen when sentiment is “risk averse”?

The major currencies that tend to rise during periods of “risk aversion” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The Dollar, because it is the world’s reserve currency and because in times of crisis investors buy US public debt, which is considered safe because it is unlikely that the world’s largest economy will go into default. The Yen, due to the increase in demand for Japanese government bonds, since a large proportion is in the hands of domestic investors who are unlikely to get rid of them, even in a crisis. The Swiss franc, because strict Swiss banking legislation offers investors greater capital protection.

Source: Fx Street

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