Mexican Peso rebounds, but carry trade exodus still bites

The Mexican Peso experienced a slight rebound against the US Dollar, surging 0.5%, but the currency's trajectory remained uncertain as investors pulled out of the "carry trade" due to a shrinking interest rate gap between the US and Mexico to its lowest mark since 2015. The USD/MXN rate dropped to 18.21, dropping from a high of 18.35.

Although Mexican Peso investors found solace, the USD/MXN uptrend was expected to persist as the interest rate divergence narrowed. The Bank of Mexico economists survey indicated that most forecasters expected interest rates to stay at 6.5% until the end of 2027. Meanwhile, the Federal Reserve was projected to tighten monetary policy by at least 0.25% by the end of the year, causing the US-Mexico interest rate differential to reach 2.25%.

Manufacturing activity in Mexico expanded in September, according to S&P Global, although the economic environment remained "quite fragile." Meanwhile, US Nonfarm Payrolls in September fell short of 90,000 expectations, coming in at 29,000, down from the previous 133,000. The US unemployment rate increased from 4.1% to 4.2%, although this was considered positive due to an uptick in the participation rate.

These developments, combined with dovish remarks from New York Fed President John Williams and Vice Chair Philip Jefferson, prompted a reduction of Fed hawkish expectations ahead of the October 28 meeting. The Fed hawkish bets for the October 28 meeting stood at 23%, while the likelihood of a hold was at 77%, as per Prime Terminal data.

Economic updates in Mexico, including Banxico's last Meeting Minutes, would be released. In the US, ISM Services PMI, jobs data, FOMC Meeting Minutes, Fed Governor Bowman's speech, and University of Michigan Consumer Sentiment were on the agenda. On the daily chart, USD/MXN traded at 18.1612 and maintained a bullish bias as it moved above the triple simple moving average cluster near 17.2340 and pushed through the prior descending resistance trendline region around 18.1200.

However, the Relative Strength Index (RSI) at 77 indicated overbought conditions, suggesting that upward momentum was stretched but not decisively reversing. Support was identified at the reclaimed trendline area near 18.1200, preceding the triple Simple Moving Average (SMA) group around 17.23, while deeper retracements could target horizontal support at 16.89.

Without prominent resistance levels in the near term, price action was likely to be influenced by momentum exhaustion and profit-taking rather than clear top barriers. The Mexican Peso, the most traded currency among Latin American currencies, is influenced by the Mexican economy's performance, the central bank's policy, foreign investment levels, and remittances sent by Mexicans living abroad, particularly in the US.

Geopolitical developments and oil prices also impact the Mexican Peso. Banxico aims to maintain low and stable inflation levels, set by adjusting interest rates. Higher rates make MXN more attractive for investors, while lower rates weaken it. Macroeconomic data releases, such as high economic growth, low unemployment, and high confidence, are beneficial for MXN, attracting foreign investment and encouraging Banxico to raise interest rates if economic strength is coupled with elevated inflation.

Conversely, weak economic data is likely to cause MXN to depreciate. Emerging-market currencies like the Mexican Peso thrive during risk-on periods, when investors seek higher-risk assets amid low market risks. Conversely, they depreciate during market turbulence or economic uncertainty.