Mexican Peso retreats again after three-day recovery

• The Mexican Peso trades slightly lower on Monday after a mild recovery. 
• The Peso gained as the effect of the Trump-trade wore off, Banxico upgraded its forecasts, and Mexico made a budget announcement. 
• USD/MXN could be starting a new leg higher after pulling back within its uptrend. 

The Mexican Peso (MXN) edges lower in its key pairs on Monday after three consecutive days of mild gains. These came partly on the back of revised forecasts by the Bank of Mexico (Banxico) at its November meeting on Thursday, an optimistic budget announcement from Mexico's Economy Minister on Friday, and as the waning bullish effect of the "Trump-trade" on the US Dollar (USD). Despite the Peso's three-day rebound, MXN is in a technical downtrend overall, suggesting vulnerabilities could lurk just out of sight. 

Mexican Peso recovery looks vulnerable 

The Mexican Peso slightly retreats on Monday after a weak recovery in the second half of last week after Banxico revised its forecast for inflation at the end of 2024 to 4.7% from 4.3%. The change suggests the central bank will probably not cut interest rates as aggressively as previously expected, propping up the Peso. The maintenance of elevated interest rates increases capital inflows into a country, supporting its currency. 

Nevertheless, Banxico went ahead with a 25 basis points (bps) (0.25%) cut at its policy meeting on Thursday, bringing its main interest rate down to 10.25% from 10.50% previously. The bank  continued to see the balance of risks "to growth of economic activity remained biased to the downside."

Also on Thursday, Moody's Ratings cut Mexico's credit rating to Baa2 "Negative" from "Stable" as a result of a combination of the country's high budget deficit, which is expected to end 2024 at 5.9% of Gross National Product (GDP), the highest it has been since the 1980s, and risks to the economy from the government's reforms of the judiciary, which Moody's views as threatening the rule of law and "eroding checks and balances" to power. 

"While our assessment of the quality of institutions in Mexico is already low compared to rating peers, particularly when it comes to rule of law and control of corruption, we will assess whether a further deterioration in the policymaking framework and the independence of the judicial system could limit the government's ability to address rising credit challenges," Moody's said.

The Mexican Finance Minister Rogelio Ramírez de la O responded to the downgrade by saying that Moody's had not taken into account his proposed budget for 2025, which was published the following day. In the 2025 budget, Ramirez de la O forecast an increase in growth of between 2% and 3% and a budget deficit of 3.9% of Gross Domestic Product (GDP). 

The budget projection suggests an increase in growth from a rate of 1.5% to 2.5% in 2024 and a reduction in the deficit from the 5.9% expected by the end of 2024, according to Reuters. 

Technical Analysis: USD/MXN closes in on November high

USD/MXN has pulled back after rallying higher within a rising channel. The short-term trend is probably bullish but could also be sideways. The pullback from the November 12 high has found support at the 50-period Simple Moving Average (SMA) in the 4-hour chart (as seen below), and the pair could be about to start recovering. 

USD/MXN 4-hour Chart 

If USD/MXN extends a new leg higher, it could rally up to a zone between 20.80 (November 6 high) and 20.89 (61.8% Fibonacci extension of the prior rally). A cross of the blue Moving Average Convergence Divergence (MACD) above its red signal line would provide a buy signal and evidence supporting such a move higher. 

A break above 20.80 would confirm a higher high and an extension of the bullish trend and unlock the next upside target at 21.00 (round number, upper boundary of channel), where buyers could start to meet resistance. 

In case USD/MXN extends its correction lower, support lies in the 19.70s from the 50-day SMA (not shown) the early November lows and the lower boundary line of the rising channel just below.