Mexican Peso plunges after US NFP data, Banxico dovish tilt

• Mexican Peso is under pressure, falling over 1% as USD/MXN hits a six-day high at 20.74.
• Strong December US Nonfarm Payrolls boost dollar; Fed may hold rates longer.
• Banxico minutes hint at larger rate cuts, adding pressure on the Peso.

The Mexican Peso (MXN) is under pressure against the Greenback, hitting a six-day low following the release of a stellar United States (US) employment report and after the Bank of Mexico (Banxico) revealed that larger interest rate cuts could be discussed in the coming meetings. The USD/MXN trades at 20.70, up more than 1%.

The US Bureau of Labor Statistics (BLS) revealed that the economy added more jobs than expected, causing a slight dip in the Unemployment Rate. This adds pressure on the Federal Reserve (Fed), which has become more worried about its mandate of maximum employment in the second half of 2024.

Recent job reports hinted that the labor market is strong, but not so inflation. According to the ISM Services PMI report, the prices paid sub-component rose sharply to 64.4, its highest level since early 2023. Following the data release, market participants anticipated one interest rate cut by the Fed in 2025.

Mexico's economic docket revealed that Industrial Production in November improved slightly, yet data was overshadowed by US data. On Thursday, Banxico released its latest meeting minutes, which despite acknowledging that inflation risks are tilted to the upside, indicated that monetary policy needs to be less restrictive, according to the Governing board.

Next week, Mexico's docket will feature Gross Fixed Investment and Retail Sales. In the US, key data releases include inflation figures on the producer and the consumer side, alongside Retail Sales and jobless claims for the week ending January 11.

Therefore, the Peso would be at risk of further depreciation due to the reduction of the interest rate differential between Mexico and the US. Although Fed officials stated they are in an easing cycle, market players are eyeing just 39 basis points (bps) of easing in the US this year against 150 bps by Banxico.

Daily digest market movers: Mexican Peso plunges amid strong US Dollar

• The BLS reported that the economy added 256K people to the workforce, according to the December Nonfarm Payrolls report, surpassing expectations of 160K. This is despite the downward revision to November's figures, which were 212K instead of 227K.
• The Unemployment Rate declined to 4.1%, while Average Hourly Earnings (AHE) slipped from 4% to 3.9%. Following the report, traders now anticipate that the Federal Reserve will implement only one rate cut in 2025.
• Banxico's meeting minutes revealed the evolution of disinflation, suggesting that the easing cycle might continue to reduce the restiveness of monetary policy. To achieve that, the Governing board stated that "larger downward adjustments could be considered in some meetings."
• Mexico's central bank improved the inflation outlook due to the progress in headline and core inflation. Officials acknowledged that services inflation decreased and they expect CPI to converge to its 3% goal in Q3 2026.
• The US 10-year Treasury note skyrocketed to 4.788% before retreating five basis points (bps) to 4.739%. This consequently weighed on the Greenback, as the USD/JPY turned negative, yet close to remaining almost unchanged.
• The US Dollar Index (DXY) rose to 109.96, its highest level since November 2022. Recently, DXY pared some of its gains and is at 109.55, up 0.36%.
• The Fed revealed its December Meeting Minutes on Wednesday. Although policymakers reduced interest rates, some participants favored keeping rates unchanged, as they noted that the evolution of the inflation downward trajectory stalled.
• Consequently, they adopted a more gradual approach as Minutes underscored that Fed officials opened the door to slowing the pace of interest rate cuts.

USD/MXN technical outlook: Mexican Peso remains heavy as USD/MXN climbs above 20.35

Having surpassed the 20.50 figure, the USD/MXN is on course to test the current year-to-date (YTD) peak of 20.90 is on the cards. The Relative Strength Index (RSI) slope cleared its latest peak, signaling bulls are gathering steam. Therefore, further upside is seen to the detriment of the bettered Peso.

The first resistance would be 20.90, followed by the 21.00 mark. On further strength, the next resistance would be the March 8, 2022 high of 21.46, ahead of 21.50 and the 22.00 psychological level.

On the flip side and the path of more resistance, if USDMXN drops below 20.50 this will expose the 50-day Simple Moving Average (SMA) at 20.30. Once surpassed the next stop is the psychological 20.00 level, followed by the 100-day SMA at 19.96.