Peso Plunge: Mexico's Currency Faces Headwinds Amid Fed's Rate Cut and Economic Uncertainty

The Mexican Peso has faced significant volatility in recent days, depreciating over 0.80% against the US Dollar as traders closely monitor the Federal Reserve's first rate cut in four years. Despite the Fed's decision to lower borrowing costs, the USD/MXN pair has held onto earlier gains, reflecting the complex factors influencing the Mexican currency. Mixed economic data from Mexico and concerns over judicial reforms have added to the Peso's woes, potentially reducing the country's investment attractiveness.

Navigating the Peso's Turbulent Terrain: Factors Shaping the Currency's Trajectory

The Fed's Rate Cut and Its Impact on the Peso

The Federal Open Market Committee (FOMC) has decided to lower borrowing costs by 50 basis points, a move that was not unanimous as Governor Michelle Bowman dissented, favoring a smaller rate cut of a quarter percentage point. The Fed's decision was driven by its confidence that inflation is moving "sustainably" toward the bank's 2% target, though the central bank acknowledged that the economic outlook remains uncertain.The Summary of Economic Projections (SEP) shows the US central bank estimating interest rates to end at 4.4% in 2024 and 3.4% in 2025. Inflation, as measured by the Core Personal Consumption Expenditures Price Index (PCE), is projected to reach the Fed's 2% target by 2026, though it's estimated to end at 2.6% in 2024 and 2.2% in 2025. Fed officials also project the economy will grow at a 2% pace in 2024, with the Unemployment Rate rising to 4.4% by the end of the year.During his press conference, Fed Chairman Jerome Powell stated that inflation risks have diminished and reaffirmed that the economy remains strong. He noted that if inflation persists, "we can dial back policy more slowly" and emphasized that the SEP indicates the Committee is not in a rush to normalize policy.Despite the Fed's decision, the USD/MXN pair has held onto earlier gains, suggesting that the market's reaction to the rate cut may not have been as dovish as expected. Traders are now closely watching the Bank of Mexico (Banxico), which is expected to lower rates by 0.25% at the September 26 monetary policy meeting decision.

Mexico's Economic Data: A Mixed Bag

The Mexican economy has presented a mixed picture in recent quarters, with data failing to provide a clear direction for the Peso. Mexico's Aggregate Demand in Q2 shrank -0.4%, below the previous reading of 1.2%. Private Spending in the second quarter plunged by 0.6% and trailed Q1's expansion by 1.8%.On the other hand, the US housing market has shown signs of resilience, with Building Permits in August growing by 4.9% month-over-month and Housing Starts expanding by 9.6%. These positive developments in the US economy could have implications for the Mexican Peso, as the two countries' economies are closely intertwined.

Judicial Reform and Investment Attractiveness

Concerns over Mexico's judicial reform and the disappearance of autonomous organizations have emerged as a potential factor weighing on the Peso's performance. Victor Manuel Herrera, President of Instituto Mexicano de Ejecutivos de Finanzas (IMEF), has commented that these changes might affect the country's economy and reduce investment attractiveness, given the phenomenon of companies relocating from the US.The potential impact of the judicial reform and the dismantling of autonomous organizations on Mexico's investment climate is a significant concern for market participants. Investors may be wary of committing capital to the country if they perceive a deterioration in the rule of law and the protection of property rights. This could further exacerbate the Peso's volatility and make it a less attractive investment destination.

Technical Outlook: Peso Volatility Persists

The USD/MXN uptrend remains intact, though the FOMC's decision could introduce sharp volatility to the pair. Momentum indicators suggest that bulls are gathering steam, as shown by the Relative Strength Index (RSI).If USD/MXN climbs above 19.50, the next resistance would be the 20.00 psychological level. Further upside emerges at the yearly peak at 20.22, followed by the 20.50 mark. Conversely, if USD/MXN drops below 19.15, key support levels emerge, like the August 23 daily low of 19.02, ahead of the 50-day Simple Moving Average (SMA) at 18.99.The Mexican Peso's performance will continue to be driven by a combination of factors, including the Fed's monetary policy, Mexico's economic data, and the perceived investment climate in the country. Traders and investors will need to closely monitor these developments to navigate the Peso's turbulent terrain in the coming weeks and months.