Mexican Peso drops as US Treasury yields rise on robust US data

• Mexican Peso on defensive as USD/MXN is back above 17.00.
• Mexican economic growth estimated at 2.1% YoY in March, but market focus shifts to upcoming Retail Sales data.
• US Treasury yields increase following lower-than-expected unemployment rate and strong Philly Fed Manufacturing Survey.

The Mexican Peso depreciated against the US Dollar as sentiment shifted sour on Thursday. Treasury yields in the United States (US) are rising following the release of a subdued US jobs report. Market participants remain wary that the Federal Reserve will keep rates "higher for longer," which would trigger flows toward the Greenback. Therefore, the USD/MXN trades at 17.06, gaining some 0.66%, and is about to refresh three-day highs.

Wall Street trades with losses amid a risk-averse scenario. Data-wise, the National Statistics Agency (INEGI) revealed that Mexico's economy likely grew 2.1% YoY in March based on a preliminary estimate. Nevertheless, traders mainly ignored the report, as they remained focused on Mexico's Retail Sales report due on April 19.

Across the border, the US Department of Labor revealed that the number of Americans filing for unemployment was lower than expected, which aligned with the previous reading and suggested that the labor market remains healthy. At the same time, the Philadelphia Fed Manufacturing Index for April crushed estimates.

On Tuesday, Federal Reserve Chair Jerome Powell said that recent data "lacked further progress on inflation this year," pointing to the remarkable performance of the US economy. During those hawkish remarks, the swaps markets adjusted their bets from 75 to 50 bps of interest rate cuts by the US central bank toward the end of 2024.

Given the fundamental backdrop, US Treasury yields are climbing, with the 10-year benchmark note rate up four bps at 4.633%. The US Dollar Index (DXY), which measures the performance of the American currency against six others, climbs past the 106.00 threshold and clocks gains of 0.22%.

Daily digest market movers: Mexican Peso at mercy of strong US Dollar

• On Wednesday, Bank of Mexico (Banxico) Deputy Governor Jonathan Heath commented that caution is important before normalizing monetary policy amid stubbornly sticky inflation. He added, "Maintaining a restrictive monetary policy is key for some time."
• The International Monetary Fund (IMF) revised its economic growth forecasts for Mexico, lowering the 2024 growth expectation from 2.7% to 2.4% and the 2025 forecast from 1.5% to 1.4%. The IMF attributed the reduction in the 2025 forecast to anticipated fiscal tightening by the new administration, which is expected to reverse the fiscal expansion that is driving growth this year. This reversal will involve scaling back current spending policies.
• US Initial Jobless Claims for the week ending April 13 came at 212K, below estimates of 215K. Continuing Jobless Claims calculated toward April 6 increased to 1.812 million from 1.810 million but missed estimates of 1.818 million.
• The Philadelphia Fed Manufacturing Index rose by 15.5, smashing estimates of 1.5. Other data showed that US Existing Home Sales tumbled 4.3% MoM, from 4.38 million to 4.19 million, below the forecast of 4.2 million.
• Geopolitical tensions in the Middle East would likely weigh on the Mexican currency.  USD/MXN traders must be aware that any escalation could prompt traders to ditch the Mexican Peso and buy US Dollars.
• Data from the Chicago Board of Trade (CBOT) suggests that traders expect the Fed funds rate to finish 2024 at 5.00%, up from 4.95% a day ago.

Technical analysis: Mexican Peso tumbles sharply as USD/MXN buyers eye 200-day SMA

The USD/MXN has shifted neutral to upward bias, with buyers aiming to test the 200-day Simple Moving Average (SMA) at 17.16. Momentum has shifted in favor of the buyers as the Relative Strength Index (RSI) has broken above the 60 level, with some room before turning overbought.

That said, a decisive breach above the 200-day SMA will expose the year-to-date (YTD) high at 17.38, ahead of the 17.50 psychological area. Once those levels are surpassed, look for a challenge of the 18.00 figure as the next resistance level.

On the other hand, if USD/MXN slides below 17.00, look for a pullback toward last year's low of 16.62, followed by the April 12 low of 16.40.