The Mexican Peso (MXN) edges higher in its most-traded pairs on Friday as market sentiment improves following the release of stronger-than-expected US data indicating a hard landing for the US economy is now less likely. The generally upbeat sentiment, in turn, benefits the risk-on MXN. 

The overall trend for the Peso of the last weeks, however, has been bearish as slowing economic growth, political factors and expectations the Bank of Mexico (Banxico) will continue with its easing cycle, all weigh. 

At the time of writing, one US Dollar (USD) buys 19.76 Mexican Pesos, EUR/MXN trades at 21.90, and GBP/MXN at 26.05.

Mexican Peso tracks riskier assets higher

The Mexican Peso edges higher on Friday, tracking riskier assets in general after the release of US annualized Gross Domestic Product (GDP) for the second quarter was revised up to 3.0% growth compared to the preliminary estimate’s 2.8%, in data released Thursday. 

Spirits were further lifted after US Initial Jobless Claims data came out slightly lower than expected at 231K, when 232K had been forecast. This was also below the upwardly-revised 233K of the previous week. Given the Fed’s new focus on “the risks to employment,” this helped instill more confidence the economy might manage to achieve a soft landing. 

That said, the Mexican Peso still faces domestic headwinds. The Bank of Mexico (Banxico) quarterly report for Q2, released on Wednesday, revealed a downward revision to the bank’s GDP forecasts for 2024 and 2025. Banxico now expects growth to slow to 1.5% in 2024, down from 2.4% in the previous report. In 2025, it expects the economy to grow by 1.2% from 1.5% previously anticipated. These revisions indicate Banxico will feel more pressure to lower interest rates to support growth. 

On the subject of adjusting interest rates, the report stated: “Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments.”Banxico did not change its inflation forecasts from those announced in its August policy meeting, but said it had included new factors such as the (inflationary) impact of a weaker Peso. It continues to see inflation falling steadily towards the bank’s 3.0% target, which it expects to hit in the last quarter of 2025. It mentioned the course of services sector inflation as a key factor in its decision making. 

Most analysts foresee Banxico making substantial rate cuts before the end of the year.  

Banorte expects a 25 basis point (bps) rate cut in September and interest rates to end the year at 10.25% (rates are at 10.75% currently).  

Citibanamex expects a quarter of percentage rate cuts in September, November, and December, with Banxico’s reference rate hitting 10.00% by year-end. 

Monex expects the bank’s reference rate to end the year at 10.25% with a cut in September, and November and December meetings “live”. 

Goldman Sachs anticipates rate cuts of 25 bps each in the three remaining meetings of the year, bringing the interest rate down to 10.00% by year’s end. 

Capital Economics foresees 50 bps of cuts before the end of 2024, bringing the reference rate down to 10.25%. 

Political risks are a further bearish background factor for the Peso. The government’s proposed reform of the judicial system has elicited criticism from members of the judiciary themselves – with protests in Mexico City – foreign diplomats and investors alike. 

The Mexican government chose to “pause” diplomatic relations with the US after the US ambassador publicly criticized the reforms, and Canada has also broken diplomatic ties. If the stand-off escalates, there is a chance it could negatively impact free trade between the three countries, with negative implications for the Mexican Peso. 

At the same time, the Peso potentially stands to benefit from an escalating trade war between North America and China. Given its role as an intermediary manufacturer for Chinese goods entering North America, the escalation of tariffs – most recently by Canada – could find it well positioned to benefit from the fallout.   

Technical Analysis: USD/MXN makes higher highs

USD/MXN trades steadily higher within a broader rising channel. It has established an uptrend and given “the trend is your friend” the odds favor longs over shorts. 

USD/MXN 4-hour Chart 

The pair made a higher high of 19.95 on Thursday, from which it is currently pulling back. Once the correction has finished, however, it will probably resume its uptrend towards a target at the upper channel line in the 20.60s.  

That said, the Relative Strength Index (RSI) is making lower highs at the same time as price is making higher highs – a sign of bearish divergence. This suggests an underlying lack of bullish strength in the rally, which could be a warning signal of deeper downside corrections to come. 

Source: FXSTREET

The report said businesses' optimism about the economy increased to a near three-year high while trading prospects for the coming twelve months remained strong despite a small dip.

The recruitment outlook also remained robust, even with a slight fall in the latest reading. Firms’ appetite to hire remained resilient despite this month’s slight fall. 53%, the same as last month, expect to increase their headcount in the next twelve months, while 16% (up from 14%) anticipate a reduction.

"Official GDP data for the first half of this year was encouraging and the survey results indicate that solid economic performance will likely continue as we move into the second half of the year," he says Ho.

The new government has committed to cutting red tape in an effort to stimulate a housing boom. This week Deputy Prime Minister Angela Rayner said she would force through up to 300K new homes which are being held up by te planning system. This looks to be having a positive impact on the sector.

Source: Poundsterlinglive

AUD/USD moves higher to near 0.6800 despite flat Aussie Retail Sales data for July.The RBA is unlikely to pivot to policy normalization this year.Investors await the US core PCE inflation for July and Caixin Manufacturing PMI for August.

The AUD/USD pair gains to near 0.6800 in Friday’s European session. The Aussie asset rises as the Australian Dollar (AUD) remains firm even though the Australian Retail Sales were reported flat in July in Asian trading hours, and China’s Manufacturing PMI is expected to have contracted consecutively for the second month in August.

The Australian Bureau of Statistics reported on early Friday that there was no growth in Retail Sales in July, while economists forecasted them to rise at a slower pace of 0.3% from 0.5% in June. Flat Retail Sales appear to be the outcome of the lower spending power of households due to high inflation and the restrictive monetary policy stance of the Reserve Bank of Australia (RBA).

Despite a slowdown in Australian consumer spending, the RBA is unlikely to cut interest rates sooner as its battle against inflation appears to be much more fierce than what other nations are facing. Recent inflation data showed that the monthly Consumer Price Index (CPI) decelerated to 3.5% from 3.8% in June but remained higher than estimates of 3.4%. According to the market speculation, the RBA is expected to keep its Official Cash Rate (OCR) at 4.35% by the year.

Meanwhile, a Reuters poll showed on Friday that China’s factory PMI, which will be published on Monday, is expected to come in below 50.0. A level that separates growth mark from contraction. This would prompt the scale of monetary stimulus to uplift poor economic prospects. Being a proxy for China’s economic prospects, the Australian Dollar will be negatively influenced by weak data.

On the Unites States (US) front, investors await the Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT. The report is expected to show that the annual core PCE inflation, which excludes volatile food and energy prices, rose at a higher pace of 2.7% from June’s reading of 2.6%, with monthly figures growing steadily by 0.2%. The inflation data will significantly influence market speculation for Fed interest rate cuts in September.

The Fed is widely anticipated to start reducing its borrowing rates in September but traders are divide over the likely rate-cut size.

Source: FXSTREET

A more than 6% drop in Nvidia somehow limited the S&P500 gains, but many stocks in the S&P500 gained yesterday after the latest GDP update came in better than expected and pointed that the US economy has grown 3% in the Q2 versus 2.8% printed earlier. The consumer spending almost doubled, as well, to 2.9% from 1.5% printed a quarter earlier. The cool down in the GDP prices was less, but core prices eased more than expected. In plain English, the data tasted exactly how investors love it – with the additional sweet topping – for the Fed rate cut expectations – that it has slowed in the Q3 but slowed from a higher mark.

So there was reason to cheer the latest growth update yesterday. The US 2-year yield rebounded a little, but settled around the 3.90% mark, the 10-year yield is at 3.86% – the gap between the two has almost closed : a positive sign for those who expect a soft landing, and the US dollar rebounded. The US dollar index recovered on the thinking that the Federal Reserve (Fed) will start cutting rates in September, yes, but a 50bp cut is probably not needed straight away.

But note that activity on Fed funds futures still gives two thirds chance for a 50bp rate cut from the Fed in the September meeting and the Fed is seen cutting rates by 100bp from now to the end of the year – a scenario that implies that we will see a sharp slowdown from the current quarter. Happily, the data is not *that* alarming. Therefore, I believe that there is room for trimming the Fed cut expectations to between 50-75bp cut this year, and that should justify a further positive correction in the US dollar and a further rotation in the S&P500 toward the growth-friendly, cyclical stocks – including energy and financials.

Europe vs US

Rotation from tech to other sectors, which is also called the reflation trade, is believed to be positive for the European stocks. And indeed, capital inflows into the European stocks outpaced inflows into the US markets in the Q2 – precisely boosted by the expectation that the global rate cuts would be better for the reflation-friendly European stocks than their technology-heavy American peers (and also because the European Central Bank (ECB) started cutting rates before the Fed).

And the Stoxx 600 has been greatly benefiting from it. Yesterday, the index almost matched a record high that was printed back in June and remains attractive for investors who look for interesting valuations to get away from highly valued American stock markets. And despite this year’s rally, the European stocks remain significantly cheaper than the ones across the Atlantic. In numbers, the Stoxx 600 offers a PE ratio of around 14 well below the S&P500’s average 21.

The problem is that the rate cut expectations alone cannot infinitely attract investors to the old continent. Europe is slowing, its airline and luxury businesses are not doing well – the Chinese woes have a significant negative impact on the most influential luxury brands – so much that the British Burberry and EasyJet risk dropping out of the FTSE 100 index shortly. And Bloomberg Intelligence revised its consensus EPS for the Stoxx 600 down by 1.4% this year, and 1.6% for next year.

Over in the US, the technology stock investors are preparing for challenging times yet the S&P500’s non-Magnificent 493 stocks saw their growth expectations more than double and should see the benefits of the upcoming rate cuts. And if the Fed can offer the US economy a soft landing, there will be nothing to stop the US indices from outperforming its European peers.

PCE watch

Today, the US will release the latest core PCE index, the Fed’s favourite gauge of inflation. The data is expected to hint at a tiny rebound in July. A stronger-than-expected read could lead to a further USD recovery. But even in that case, the Fed doves are more interested in jobs data than inflation figures. What would really change the game is… a strong jobs data from the US next week.

Currencies

The US dollar’s latest rebound pulled the EURUSD lower yesterday. Softer-than-expected German and Spanish inflation updates helped bringing the ECB doves back to the market. Inflation in Germany even fell below the ECB’s 2% target! The combination of less dovish Fed expectations and more dovish ECB expectations sent the EURUSD all the way down to 1.1070. The pair is consolidating near the 1.1075 this morning. The aggregate CPI data from the Eurozone will likely confirm the slowing price pressures in the Eurozone in a way to let the ECB consider a clearer path for easing its policy. The EURUSD could find a good reason to return below the 1.10 mark – especially if we welcome a strong jobs data from the US next week.

Elsewhere, the USDJPY consolidates a touch below the 145 mark amid a mixed bag of data released in Tokyo earlier this morning. The data showed a slower rebound in industrial production, a bigger-than-expected slowdown in retail sales, a larger-than-expected rise in unemployment rate and a stronger-than-expected inflation during late summer. We believe that ongoing price pressures will likely keep the Bank of Japan inclined toward normalization. However, if economic fundamentals deteriorate further, the BoJ could quickly reverse course and extend support to the economy. This would hinder the Japanese yen’s recovery and potentially enhance carry trades.

Source: Reuters

(Aug 30): Treasuries are poised for their longest monthly winning streak in three years as traders look past US data on personal income and expenditure due Friday and prepare for the Federal Reserve to start cutting interest rates.

US government bonds returned 1.5% in August through Thursday, set for a fourth month of gains that would be the longest run since July 2021, according to the Bloomberg US Treasury Total Return Index. The gauge has been rallying since the end of April, extending this year’s gain to almost 3%, as investors have grown more confident in the case for lower US borrowing costs.

The bond index has bounced back from its 2.3% loss in April as signs of cooling inflation and easing job growth have given the Fed more scope to cut rates from the highest level in more than two decades. Bloomberg Economics sees Friday’s report on personal income and outlays reviving talk of a “Goldilocks” economy, and expects the Fed to cut interest rates by 50 basis points in September, followed by another jumbo reduction before year-end.

Treasury 10-year yields slipped to a 14-month low of 3.67% in early August following weaker-than-expected US payroll data, before climbing back to 3.86% on Friday. Treasuries were little changed on the day.

“The bond market is still an interesting place to be,” Tiffany Wilding, an economist at Pacific Investment Management Co, said in an interview on Bloomberg Television. “We see a lot of value despite the recent rally.”

At the Jackson Hole symposium last week, Fed chair Jerome Powell said “the time has come for policy to adjust,” marking a turning point in the central bank’s battle against inflation. The Fed has kept the benchmark rate in the range of 5.25% to 5.5% since July 2023.

Swap traders are pricing in about 100 basis points of easing this year, which implies a reduction at every remaining policy meeting through December, including one 50-basis-point cut.

Short-term notes, which are more sensitive to the Fed’s policy, outperformed this month, leaving a key section of the yield curve on the verge of turning positive for the first time since July 2022. The two-year yield is less than five basis points above its 10-year counterpart. The gap was more than 100 basis points in March 2023, the deepest inversion since the 1980s.

Treasuries’ winning streak has some concerned that the rally has gone on long enough. The risk now is the labor market stabilises, spurring the Fed to ease monetary policy slower than the market is anticipating.

The run paused on Thursday after second quarter US GDP growth and weekly jobless claims pointed to a resilient economy.

The month will end with the release of the PCE measure of inflation that is closely followed by the Fed. But the key read on the economy and labor market will come at the end of next week with the August payroll data.

“It’s amazing to me just how much sentiment has shifted,” said Meghan Swiber, a US rates strategist at Bank of America Corp. But the data so far hasn’t fully justified “the narrative that the Fed is going to deliver very swift, aggressive cuts this year,” she said.

Source: The edge markets