Mexican Peso range bound ahead of Retail Sales, weak growth outlook a headwind

23 Oct 2024, 08:33 by Joaquin Monfort · FXStreet

The Mexican Peso is trading sideways ahead of key economic data for Mexico.
The latest IMF report maintained its lower GDP growth estimate for the country and suggests data in H2 will be weak.
USD/MXN describes a range below the key 20.00 hurdle but remains in a broader uptrend overall.

The Mexican Peso (MXN) trades range bound in its key pairs on Wednesday, continuing the theme of the week so far. Uncertainty over the outcome of the US election on November 5 (a Trump win would be negative for the Peso), the general hit to emerging market assets due to the global sell-off in bonds amid a smoother downward trajectory of US interest rates, weak economic activity data and lower International Monetary Fund (IMF) growth forecasts for the Mexican economy, are amongst the major themes impacting the Peso and its counterparts.

Mexican Peso vulnerable if IMF forecasts hold true

The Mexican Peso is ranging within a broad downtrend as multiple negative factors weigh. Lower projected economic growth is one of the key ones.

The IMF released its October World Economic Outlook on Tuesday and maintained its 1.5% Gross Domestic Product (GDP) growth forecast for Mexico in 2024. This is well below Q2 GDP data, which showed a 2.1% rise in annualized growth in the quarter but is equal to Q1’s 1.5%. It would suggest that the next two quarters of growth in Mexico are likely to be substantially lower.

Further, in 2025, the IMF expects Mexico to grow by only 1.3%, which is well below the Bank of Mexico’s (Banxico) 3.0% target. In 2026, the IMF expects growth of 2.1%.

If the IMF forecasts are accurate, the lower growth will probably lead to a sharper disinflationary trend and encourage Banxico to cut interest rates more aggressively. Economists are already factoring in a 50 basis points (bps) (0.50%) of cuts by the end of 2024, bringing the bank’s main interest rate down to 10.00%. This, in turn, is likely to put downward pressure on the Peso, since lower interest rates attract less foreign capital inflows.

Mexican Economic Activity data out on Tuesday may already have given investors a taste of what is to come after falling well below estimates. On a month-over-month basis, activity sank 0.3% in August, down from 0.6% in July and below the estimated decline of 0.1%. On an annual basis, Economic Activity expanded by 0.4%, beneath forecasts of 0.7%, and down from July’s 3.8% growth.

Mexican Retail Sales data for August is scheduled for release on Wednesday and is expected to show a 0.4% decline on an annual basis and a 0.2% rise monthly. This is followed by inflation data out on Thursday, which will be significant for the Mexican Peso as it impacts on Banxico monetary policy decisions.

Technical Analysis: USD/MXN remains range-bound within an uptrend

USD/MXN trades up and down with a mini range just below the 20.00 handle. However, it is in a medium and long-term trend, so once the consolidation ends, the pair will probably go higher. Given the principle in technical analysis that “the trend is your friend,” the odds favor more upside to come.

USD/MXN 4-hour Chart

The break above 19.83 (October 1 high) has confirmed a probable move up to the next target in the vicinity of the September 10 high at 20.13.

Economic Indicator

1st half-month Inflation

The 1st half-month core inflation index released by the Bank of Mexico is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of Mexican Peso is dragged down by inflation. The inflation index is a key indicator since it is used by the central bank to set interest rates. Generally speaking, a high reading is seen as positive (or bullish) for the Mexican Peso, while a low reading is seen as negative (or Bearish).