Weekly Outlook: Higher Consumer Prices Expected To Lift Mexican Peso

Fundamental: Looking to the coming days, traders next await Mondays CPI report to give a clear indication on price pressures for the domestic economy. After rising to 7-month highs of 3.5 percent annualized inflation in August, markets now predict that prices will continue to make new highs of 3.89 percent in September. <For Full Story Look Below>

Full Story:  The Mexican peso has remained relatively unchanged in the past week of trading, as crude oil prices at 8-month lows have offset strength following optimistic consumer confidence report. After losing nearly 9 cents against itsUS counterpart through Tuesdays price action, the bullish outlook on consumer spending allowed the Mexican peso to recover nearly half of its previous declines.

Looking to the coming days, traders next await Mondays CPI report to give a clear indication on price pressures for the domestic economy. After rising to 7-month highs of 3.5 percent annualized inflation in August, markets now predict that prices will continue to make new highs of 3.89 percent in September. Such a result would leave the key figure near the top of the central banks 2-4 percent comfort range and likely subdue speculation that the Banco de Mexico will move to cut interest rates in the coming months, which has been the scenario over previous months. Risks on consensus estimates remain to the downside, however, as elevated food prices may not be enough to offset falling energy costs. Also due next week, industrial production data is likely to show that annualized growth edged lower on falling utilities and mining activity. Weakness in commodity prices has spared few corners of the Mexican economy, as headline Industrial growth moves below trend as a result. The news may not be as bad as initial reactions would assume, however, as the slower utilities expansion will likely boost domestic consumption in other goods.

This past week saw consumers express higher confidence on the state of the overall economy, as falling gas costs boosted disposable incomes. Survey results were enough to push the Mexican peso higher, as it added five cents against the US dollar. Broader market themes moved it in the opposite direction, however, as oil prices below 60 dollars per barrel weighed on all commodity-linked currencies. Given that petroleum exports amount to nearly 4 billion dollars per month, continued weakness could spell disaster for the Mexican trade balance that has already reached 8-month lows. Traders will closely monitor any further developments in energy trading, especially as it concerns net exports and domestic consumer expenditures. Otherwise, the upcoming CPI report will garner the most scrutiny, as speculators wonder whether heightened inflation will effectively rule out lower interest rates in the medium term. Many analysts claim that the Banco de Mexico is likely to cut the central rate by as many as 50 basis points after president-elect Felipe Calderon takes office. Needless to say, inflation at the top of the banks 2-4 percent target rate would rule out such a scenario, and theoretically set the stage for a neutral-to-hawkish stance on price stability.  

Economic Releases for October 5 October 12

Technical: USDMXN The USDMXN continues to work higher from the supporting trendline drawn through 10.7328, 10.8260, and 10.8921.  The trendline is currently at 10.9740 and price above keeps the bias a bullish one.  The 10/4 high at 11.0732 is initial resistance and a push above exposes the 9/25 high at 11.1226.  A breakout is possible if price clears 11.1226.  Focus would then shift to the 61.8% Fibonacci level of 11.5200-10.7328 at 11.2192.  A break below the aforementioned trendline negates the near term bullish bias.  Support in this case would be the 10/2 low at 10.9604 and the 200 day SMA at 10.9115.  

Key Levels & Technical Indicators