Peso (USD/MXN) gains as budget from Mexico’s new President is seen as responsible

Peso rallies on budget optimism

The Mexican peso rallied at the start of the week after Mexican President Adres Manuel Lopez Obrador released his 2019 budget plan to Congress over the weekend.  The 2019 budget plan showed more spending on social programs, infrastructure and preserved fiscal framework set forth by predecessors.  Targeting a primary surplus of 1% of GDP in 2019, up from 0.8% this year was well received, but will come into question if the we see a revenue shortfall next year.  Mexican lawmakers will have until the end of the year to finalize the budget.

Budget Assumptions

The budget assumes that inflation will come down to 3.4% which is back into the 2-4% target range.  GDP is expected to come in at 2% which is slightly ahead of the consensus at the Mexico central bank.  The peso exchange rate is also seen at 20, which is somewhat in line with the market expectation that emerging markets could stabilize in 2019.

Banxico and Fed rate decisions this week

The Fed will precede the Mexican Central Bank (Banxico) and is expected to deliver a rate hike and become more dovish in its language.  The dot plots will come into focus and a reduction in their targeted rate hikes is expected.  At the September meeting, they targeted 3 hikes for 2019, while Wall Street is targeting between one and two hikes.

With inflation still running high, the Mexico Central Bank is expected to raise rates on Thursday by 25 basis points to 8.25%.  At the last meeting, they raised rates by 25 basis points, while one member called for a hike of 50bps.  The bank also highlighted that the recent weakness in the peso stemmed from the cancellation of the $13 billion airport.  A dovish hike by the Fed and rate hike by the Fed could be very bullish for the Mexican peso.

USD/MXN Daily Chart

The peso’s positive start may be short-lived as market participants will focus in on monetary policy for the remainder of the week.  Price action on the USD/MXN daily chart shows that the longer-term triangle pattern is holding up and that the resistance line from the January 2017 high remains key.  If we continue to see a firmer peso this week, initial support may come from the 19.933.  Deeper support may come from the 19.6000 area, it is around that level that price could form a bullish butterfly pattern.  If valid, we could see price attempt to recapture the 20.000 handle.

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