Mexican Peso sinks in risk aversion sentiment, USD / MXN considers 200-day SMA. Now what?
KEY POINTS OF MEXICAN PESO:
- Risk aversion and widespread strength of the US dollar penalize emerging market currencies
- Mexican peso weakens for two consecutive days against the greenback, but losses could be transient
- Mexico’s June CPI data this week will be closely scrutinized to determine if Banxico will enter an aggressive tightening cycle
Most read: US Dollar Gains But US Yields, Hike Rates Drop – Market Minutes
The Mexican peso suffered heavy losses on Tuesday, weakening for the second day in a row, under pressure from wide-seated US dollar strength, feeling of risk aversion and massive sale of oil, one of Mexico’s top exports (at the time of this writing, the USD / MXN climbs 0.7% to 19.99).
MXN’s depreciation, however, may be temporary, as lower U.S. Treasury rates could support emerging market currencies over the medium term. This morning, the US 10-year yield briefly fell to 1.3510% in the wake of June’s ISM services data, hitting its lowest level since late February. As a reminder, activity in services sector grew up on 13e consecutive month, but has slowed from its recent peak in May, indicating that the recovery may falter.
Many investors believe that moderate economic growth, coupled with a labor market that has not made enough progress towards the Fed’s mandate, can delay everything QE reduction announced until the end of the year. This scenario can depress long-term T-bill yields and boost EMFX across the board as rates start to rise in many of these economies (several central banks of EM start tightening cycles to fight inflation).
As we turn our attention to the Mexican economy, mounting inflationary pressures could cause Banxico to increase borrowing costs at each of its four remaining meetings this year. To better predict what the central bank might do in the second half of 2021, it’s important to keep a close eye on consumer price data. In this context, INEGI will publish its June IPC report on Thursday. Any sign that inflation is not slowing could help cement expectations of aggressive monetary tightening, supporting MXN over the medium term (a tightening cycle in Mexico will strengthen the carry advantage of MXN, increasing its appeal in the market. foreign exchange).
USD / MXN TECHNICAL ANALYSIS
USD / MXN has rebounded from the 19.80 area and now appears to be approaching its 200-day simple moving average, near 20.20, a key technical resistance. If buyers manage to push the price above that level, buying pressure could intensify and drive the exchange rate towards 20.75, where the June high converges with a downtrend line of 12. month.
On the other hand, if the sellers come back into the market and the USD / MXN swings lower, the first support appears at 19.80, followed by the annual low of 19.55. Lower, the psychological 19.00 comes into play.
TECHNICAL TABLE USD / MXN
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— Written by Diego Colman, DailyFX Market Strategist
Follow me on Twitter: @DColmanFX