- Mexican Peso recovers from a sharp decline due to US trade threats, showing market resilience.
- Despite improved risk sentiment, Trump’s reaffirmed tariff plans on key industries maintain market tension.
- Traders eagerly await Mexican economic indicators, including the December Unemployment Rate and preliminary Q4 GDP.
The Mexican Peso (MXN) recovered some ground after Monday’s session, when it depreciated over 2% due to United States (US) President Donald Trump’s trade threats to Colombia over its reluctance to accept Washington’s conditions on receiving planes carrying illegal immigrants. The USD/MXN trades at 20.54, down 0.49%.
Risk appetite improved during the day following Monday’s sell-off, due in part to Chinese company DeepSeek’s advance on AI and Trump’s trade rhetoric. Although the frenzy on AI has tempered, Trump doubled down on his trade policies, saying that he would apply tariffs to chips, pharmaceuticals, aluminum, steel and copper.
Mexico’s economic docket is absent on Tuesday, unlike the US. Durable Goods Orders for December disappointed investors, but excluding transportation rose, a sign that business spending would likely improve in 2025 Q1.
On the consumer side, the Conference Board (CB) revealed that Americans are less optimistic about the economy. The report revealed that labor market conditions fell for the first time in four months as people grew pessimistic about future employment prospects.
This week, Mexico’s economic docket will feature the Unemployment Rate for December, along with the release of preliminary Q4 2024 Gross Domestic Product (GDP) figures.
Daily digest market movers: Mexican Peso appreciates as Banxico shifts dovish
- Banco de Mexico (Banxico) presented its Monetary Program for 2025, in which the Central Bank hinted that the Governing Board is eyeing cuts to Mexico’s main reference rate of a greater magnitude than previously seen in 2024.
- Economists polled by Reuters project Mexico’s GDP to dip -0.2% QoQ from an expansion of 1.1%. On an annual basis, GDP is foreseen to edge lower from 1.6% to 1.2%.
- Citi revealed its Expectations Survey, in which Mexican private economists revised GDP figures for 2025 downward to 1%. Regarding inflation, economists foresee the Consumer Price Index (CPI) at 3.91%, while the core CPI is projected at 3.68%. Both figures are within Banxico’s 3% plus or minus 1%.
- The USD/MXN exchange rate would likely end in 2025 at around 20.95.
- Banxico is expected to lower rates by 25 basis points (bps) from 10.00% to 9.75%, though some analysts expect a 50-bps cut at the February 6 meeting.
- US Durable Goods Orders plummeted to -2.2 % MoM in December, missing the 0.8% increase expected by economists and worse than November’s -2% contraction.
- The Conference Board revealed that US Consumer Confidence dipped to 104.1, below the 105.6 foreseen by analysts. The report showed that all five components of the index deteriorated.
- Money market futures have priced in 54 bps of Fed rate cuts in 2025, according to CME FedWatch Tool data.
USD/MXN technical outlook: Mexican Peso climbs as USD/MXN extends its losses
The USD/MXN is retraining at the time of writing, although it hit a five-day peak of 20.77 as buyers eyed the year-to-date (YTD) high of 20.90. Momentum is slightly tilted to the downside, but the major trend is up, as shown by the Relative Strength Index (RSI).
However, bears are lurking as they pushed the exotic pair lower, but if they are hopeful of reaching lower prices, they need to clear the psychological 20.50 figure. In that outcome, the next support would be the 50-day Simple Moving Average at 20.38, followed by the 100-day SMA at 20.06. Once those levels are taken, the 20.00 figure is next.
Conversely, if USD/MXN climbs past the YTD peak of 20.90, the next resistance would be 21.00 ahead of the March 8, 2022, peak at 21.46. A breach of the latter will expose 22.00.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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