The Mexican peso fell for a third session, down over 0.4%, as USD/MXN rose to 17.29 and pushed through the 100-day SMA at 17.26. After the Federal Reserve lifted the fed funds rate by 25 basis points to 3.75–4.00% and Banxico kept its benchmark at 6.50% after ending its easing cycle, the Mexico–US rate gap narrowed to 2.50% in MXN’s favour, the slimmest since 2015. Mexico’s August retail sales improved to -0.1% m/m from -0.2% but undershot forecasts for a 0.2% rise, while the annual pace slowed to 1.8% from 2.9%.
Earlier market moves included USD/MXN reaching 25.78 in April 2020 before sliding to 16.26 in April 2024, and the pair now sits above a 50/100/200-day SMA cluster at 17.1558. On the chart, resistance is referenced at 18.1651 and 21.0808, while support is seen at 17.155 and 16.8866; the RSI (14) reads 65.1. Attention turns to Banxico’s rate decision and US flash PMIs, jobs data and consumer sentiment, with Prime Terminal placing December hike odds at 90% after hawkish Fed commentary.
Derivative Trading Opportunities Amid Shifting Technicals
We advise derivative traders to position for a sustained USD/MXN upward shift as the pair clears its 100-day Simple Moving Average (SMA) of 17.26. With the spot price breaking past 17.29, the technical bias has flipped bullish, suggesting that short-MXN exposure is now highly favorable. To capitalize on this momentum, we recommend buying short-term USD/MXN call options to capture further upside while limiting downside risk.
Interest Rate Differential and Domestic Data as Drivers
The primary driver behind this shift is the rapidly shrinking interest rate differential between the US and Mexico, which has compressed to just 2.50%, its lowest level since 2015. Historical trends reveal that when the carry cushion thins, foreign investors quickly unwind their long peso positions, sparking sharp upward moves in the currency pair. We expect this unwinding process to accelerate in the coming weeks, especially as Banxico keeps its policy rate paused at 6.50% while the Federal Reserve hints at more rate hikes.
Further pressure comes from Mexico’s latest domestic data, with August retail sales disappointing at a 0.1% month-on-month contraction and slowing to a 1.8% annual rate. This economic cooling, combined with a 90% market probability of another US rate hike by December, heavily favors the US dollar. Consequently, we suggest that traders hedge their peso-denominated assets by using put options or buying USD/MXN futures to protect against ongoing weakness.
