Mexican Peso appreciates as Fed-inspired good mood continues

• The Mexican Peso edges higher in most pairs on an upbeat market mood. 
• Investors are relieved the Fed did not suddenly change course and threatened to raise interest rates at its May meeting. 
• Mexico S&P Global Manufacturing PMI data eases lower but remains in expansionary territory. 

The Mexican Peso (MXN) edges higher in most pairs on Friday as investor risk appetite remains strong, supporting commodity-related currencies and risk-sensitive FX such as the Mexican Peso. 

Asian markets tracked Wall Street higher overnight as fears melted away following the slightly dovish outcome of Wednesday's Federal Reserve (Fed) meeting. Investors had started to fear the Fed might suddenly change its course and start raising interest rates amid persistent inflation.   

USD/MXN is trading at 16.96, EUR/MXN at 18.22 and GBP/MXN at 21.28, at the time of publication during the European session. 

Mexican Peso temporarily weakens after release of Manufacturing PMI 

The Mexican Peso weakened temporarily on Thursday after the release of the S&P Global Manufacturing PMI for Mexico. The survey of purchasing managers in the Manufacturing sector showed a fall to 51.0 in April, down from 52.2 in March and 52.3 in February. It was the third monthly decline in a row, although the metric remains in expansive territory (above 50) - and at historic highs for the Index.  

Fierce competition from rival firms in China and weak overseas demand were seen as major factors in the slowdown. 

"A renewed fall in production volumes is a strong indication of how detrimental competitive conditions and weak international sales were to Mexican manufacturers at the start of the second quarter," said Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

The fall in overseas demand was offset to a certain degree by continued robust domestic demand.

"Mexico's domestic market fared better in comparison, neutralizing the weakness in overseas demand. Total new orders rose for the third consecutive month in April, amid

reports of successful advertising, demand resilience and the upcoming elections," the report said. 

Inflation absorbed

Although respondents in the PMI survey reported a rise in the cost of components, manufacturers on the whole absorbed the rise themselves, keeping prices of finished goods stable.

"Input price inflation remained elevated, but manufacturers kept prices charged from customers broadly unchanged amid ongoing efforts to secure new work," noted Pollyanna de Lima. 

Also on Thursday, Business Confidence for Mexico's industrial sector fell to 54.2 from an upwardly revised 54.4 in March, according to data from INEGI.  

Foreign Exchange Reserves held by Banxico remained unchanged at $220B in March, and Mexico's fiscal balance showed a widening of the deficit to $437.2B, according to the Secretaría de Hacienda y Crédito Público. 

In a poll of private analysts, headline inflation was expected to rise to 4.20% in 2024, up from the March estimate of 4.10%, revealed Banxico.

Technical Analysis: USD/MXN in sideways short-term trend 

USD/MXN continues its short-term sideways trend, oscillating between the parameters of a range with a floor at 16.86 and a ceiling at 17.40. 

USD/MXN 4-hour Chart 

The pair is currently trading close to the range lows. 

Given the established sideways trend is tipped to continue, the next move will probably be a leg back up towards the range highs. 

The pair formed a bullish Japanese Hammer candlestick reversal pattern (circled) on Thursday which could mark the beginning of the new up leg within the range, however, it is still early to say with any confidence and candlesticks are only very short-term signals. 

The Moving Average Convergence Divergence (MACD) indicator is poised to cross above its signal line offering a buy signal and potentially adding weight of evidence to the bullish Hammer. 

More upside could take the USD/MXN up to the 50 Simple Moving Average (SMA) on the 4-hour chart at 17.07, followed by the lower high at 17.15. A clear break above the zone of resistance around 17.15-17.18 might see further gains up towards the range highs again. 

A decisive breakout of the range - either below the floor at 16.86, or the ceiling at 17.40 - would change the directional bias of the pair. 

A break below the floor could see further downside to a target at 16.50, followed by the April 9 low at 16.26.

On the other side, a break above the top would activate an upside target first at 17.67, piercing a long-term trendline and then possibly reaching a further target at around 18.15. 

A decisive break would be one characterized by a longer-than-average green or red daily candlestick that pierces above or below the range high or low, and that closes near its high or low for the period; or three green/red candlesticks in a row that pierce above/below the respective levels.