Mexican Peso recovers to seven-day high despite Banxico's dovish stance

• Mexican Peso stages a comeback, reversing earlier losses driven by brief escalation in Russia-Ukraine conflict.
• Banxico Governor Victoria Rodriguez Ceja indicates the potential for continued rate cuts.
• Mexico's 2025 fiscal budget viewed as optimistic, based on growth targets of 2-3% amid concerns over public spending cuts.

The Mexican Peso advanced against the US Dollar during the North American session on Tuesday, yet it recovered some ground after the USD/MXN hit a daily high of 20.34 due to risk aversion. A brief escalation of the Russia-Ukraine conflict was the main reason that pushed the pair higher, yet the Mexican currency staged a comeback despite dovish rhetoric by Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja.

At the time of writing, the USD/MXN trades at 20.15, around seven-day lows. Earlier, headlines revealed that Russia had widened its doctrine for using nuclear weapons, though toned down its rhetoric as Foreign Minister Lavrov said, "Russia's position is that nuclear war won't happen." This sparked the Peso's rally, to the detriment of the Greenback, as traders seeking risk lifted US equities higher.

Banxico Governor Victoria Rodriguez Ceja told Reuters the central bank would continue to cut its benchmark rate. "Given the progress of disinflation, we believe that we can continue with the cuts to the reference rate, and in the following meetings, we will be assessing the inflationary outlook and making the corresponding decisions," said Rodriguez late on Monday.

On Friday, the Finance Ministry presented the 2025 fiscal budget. Regarding this, Gabriela Siller of Banco Base said, "It is extremely difficult to achieve GDP growth of between 2% and 3% in 2025, especially in the first year of administration and with cuts in public spending."

The Ministry of Finance projects Gross Domestic Product (GDP) to reach 2% to 3%, though it has been qualified as optimistic by most analysts.

James Salazar, Deputy Director of Economic Analysis at CiBanco, said, "It is optimistic [...] Is it feasible? It can be achieved with a combination of a change in perception. The problem is that it seems that everything is against the Mexican economy, and this will make it difficult to achieve this goal, so it seems complex."

In an interview with El Financiero, Salazar questioned where the resources would come if the growth expectations were not met, as most income would be tax, of around 2.6%, up to 5.3 billion Pesos.

On the US front, the economic schedule revealed housing data slightly below estimates that failed to underpin the Greenback. Kansas City Fed President Jeffrey Schmid will give a speech on Tuesday. By Wednesday, speeches by Fed Governors Lisa Cook, Michelle Bowman and Boston Fed President Susan Collins will be scrutinized by market players in search of cues for the path of US interest rates.

Besides this, traders continued to assess US President-elect Donald Trump's inflation-prone policies, which might deter the US Federal Reserve (Fed) from lowering rates.

Daily digest market movers: Mexican Peso climbs despite strong US Dollar

• The USD/MXN shrugs off a strong US Dollar. The US Dollar Index (DXY) is up 0.14% at 106.36.
• US Building Permits in October improved compared to September but dropped -0.6% from 1.425 million to 1.416 million.
• Housing Starts for the same period tumbled for the third consecutive month, contracting by -3.1% from 1.353 million to 1.311 million.
• Market participants trimmed estimates for a 25 bps cut by the Fed, with odds falling from 62% to 59%. The odds of keeping rates unchanged are up at 41%, as depicted by the CME FedWatch Tool.
• Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 23 bps of Fed easing by the end of 2024.
• Last week, Moody's changed Mexico's credit outlook to negative, mentioning constitutional reforms that could negatively impact Mexico's economic and fiscal strength.

USD/MXN technical outlook: Mexican Peso climbs as USD/MXN drops below 20.30

Although the USD/MXN posts five consecutive days of losses, the pair remains upwardly biased, unless sellers drive the exchange rate below the confluence of the 50-day Simple Moving Average (SMA) and the November 7 low around 19.75. But firstly, traders must clear the 20.00 psychological figure, followed by the latter, before challenging the 19.50 mark.

Conversely, buyers need to lift the exchange rate past 20.50, before challenging the November 12 peak at 20.69. Once those levels are taken out, the next resistance would be the year-to-date (YTD) high of 20.80.

Oscillators like the Relative Strength Index (RSI) remain bullish though short-term, suggesting some consolidation before buyers gather steam.