USD / MXN Bullish momentum wanes as yields retreat. New trend?
MEXICAN PESO PERSPECTIVES:
- USD / MXN retreated from its recent multi-month high as US Treasury rates rose started to descend
- News that the Fed could start cutting back on asset purchases as early as next month has not had a major impact on currencies, as traders have already anticipated this scenario.
- In the short term, the dynamics of bond markets and investors the feeling will be the main catalysts for the Mexican peso
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Volatility in the EMFX space has been high following the September FOMC meeting, while the sudden and disproportionate rise in U.S. bind rates supported demand for the US dollar, while simultaneouslystimulating a certain aversion to risk. During this period, the USD / MXN briefly climbed from 20.05 to 20.90, although this week it started to retreat towards 20.55 as yields fell from their recent peak, with the 10-year rate rising from 1.636% to 1.525% in the last three days.
Yesterday, the Fed’s report from its conclave last month showed that policy makers could start slowing down the pace of asset purchases from mid-November, ending the process towards in the middle of 2022. As the message was carefully choreographed by the central bank, the minutes produced moderate backlash across asset classes, a sign that traders and investors have ruled out the start of policy normalization altogether.
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In any case, like the Fedthe general reserve monetary policy is becoming less accommodating, rates should resume their rise, but with “Decreasing expectations” price in and signs of a spike in inflation, the bullish movement should be less aggressive than that observed recently. Although it is not ideal, the Mexican peso should be able to resist the steepening of the U.S. cash flow curve if the process takes place in an orderly fashion, principally because the Latin American currency maintains a attractive wearing advantage on the greenback and Banxico set to tighten policy twice more in 2021, after increasing already three times this year.
Besides bond market dynamics, short-term traders should also keep an eye on investor sentiment as The earnings season kicks off on Wall Street. So far, the results have been mostly positive, especially for fat banks, which posted strong income and provided constructive advice. If companies in other sectors also manage to beat street consensus and offer a positive outlook for earnings, worries about the slowing economy may start to lift. to calm down, stimulating the appetite for riskier currencies like the Mexican peso (the Mexican economy should benefit from a solid recovery in the United States given the strong trade relationship between the two countries).
USD / MXN TECHNICAL ANALYSIS
After failing to clean Fibonacci resistance near 20.85 / 20.90 three times the last days, USD / MXN started to retrace towards 20.55 in the midst of weakening buying interest, but price action remains biased upward following the development of a Golden cross in the daily chart. Having said that, for downward pressure to to recover, the golden cross mentioned before would be have go back and give way to a death cross, in which case we might see a pullback around 20.45 / 20.40. Traders should look for further weakness if there is a move below this floor with the next support seen near 20.20 followed by 19.85.
On the other hand, if the USD / MXN resumes its ascent more decisively, the first resistance to watch is at 20.85 / 20.90. If the bulls manage to push the currency pair above this solid barrier, there would be room for a rally to the annual high at 21.64, but this scenario seems wacky at this point, especially with the stabilization of risk appetite.
TECHNICAL TABLE USD / MXN
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— Written by Diego Colman, contributor