Weekly Outlook: Peso Interpreting Inflation In Mexico

Full Story:  After two months of a steadily descending trend against the US dollar, the Mexican peso looks to have finally broken its price action shackles.   Following the third test of the 0.0900/20 level support since the beginning of September, the Peso finally rallied a respectable bid to carry the MXNUSD cross on a near 165 point run to 0.9170.  Now bulls supporting the exotic will look for consistency in the coming periods data and more chatter from central bank officials to determine whether buying the volatile currency is the best bet for their money.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Though the Mexican peso has made significant gains in the final days of the past week, any further headway may be more difficult to win.  Looking to the calendar of coming economic indicators, there are only two market worthy events positioned on the schedule: industrial production and the unemployment rate.  Furthermore, the two indicators lie at opposite ends of the week, producing a fundamental lull for a number of trading days that could quickly give the skeptics behind the pesos rally time to gather opposing momentum.  Acting first in the name of the currency will be Fridays release of industrial production for the year through August.  Growth in factory activity is actually expected to cool for the second consecutive month to a 5.0 percent pace from the 5.8 percent seen in the month prior.  Expectations of the moderated pace find support in the consistent rise in raw material prices over the same period and the dear issue of lending rates based on a 7.0 percent benchmark.  On the other hand, barring a large surprise to the downside, a bearish response to a softer number may be tempered as the market looks forward to cheaper energy prices in September to boost a lagging manufacturing component.  The next indicator doesnt come until Thursdays jobless rate.   Septembers unemployment rate is expected to ease slightly from its yearly high the month before as to a 3.8 percent pace.  Such a shift would garner some interest, but the historically slow-to-move indicator may not be market moving enough to counter the potential of cross pair data. 

Over the previous week, it was a potent mixture of data and interest rate speculation that drove the Mexican currency to make its sizable break that suggests the winds of favor have changed. The first, and perhaps least relevant, release for consideration was Julys gross fixed investment.  Expected to slow once again from the highs seen in the first two quarters, business spending nearly replicated the previous periods number with 11.1 percent growth.  However, given how lagging this indicator is and its neutral read, there was little interest gathered after the report.  Another indicator passed over, was the final fixing for Augusts trade balance.  Little changed from its initial eight-month low, the market instead turned to the eagerly anticipated consumer price index report.  According to the report, inflation jumped 1.01 percent over the month, the fastest pace in six years, as agricultural product prices soared.  The unexpected and sharp increase in foods-related price growth was triggered by a number of hurricanes that slammed into the nations Pacific coast and ground production and distribution to a halt.  While this was obviously a temporary effect, it led many to believe that Banco de Mexico would hold off on another rate cut until the second half of 2007.  On a cautionary note though, Central Bank governor Guillermo Ortiz commented the annual inflation rate would fall below the BoMs comfort limit 4 percent by the end of the year; in effect calming the bullish sentiment surrounding a pause on rate cuts. 

Economic Releases for October 13 October 20

Technical: USDMXN The USDMXN has broken below a 2 month trendline drawn through 10.7328, 10.8260, 10.8934 and 10.9604.  21 day momentum is negative for the first time since 10.8625.  Price is also just above the 200 day SMA (10.9214).  A closer look at the daily chart shows a possible head and shoulders since February.  The neckline from this pattern would be at 10.8370 today (line in bold on chart below).  A break below the neckline would open the door for an attack on 10.7328.  Resistance is former support at 10.9927.

Key Levels & Technical Indicators