MEXICAN PESO ANALYSIS:
- USD/MXN has soared over the past couple of weeks as bond yields have risen sharply on Fed tapering bets.
- Treasury rates may continue to rise if NFP data shows strength in the U.S. labor market
- Despite recent weakness, the Mexican peso maintains good medium-term fundamentals with respect to the U.S. dollar
Most read: Short-term Drivers Stack Up for the U.S. Dollar
A couple of weeks ago, after the latest FOMC meeting, I warned of potential turbulence in the EMFX space amid rapidly rising bond yields. Since then, the Mexican peso has been on a wild ride, with USD/MXN exploding higher and going from 20.10 to 20.88 and back to 20.66 in less than 10 trading days. During this time, the 10-year U.S. Treasury rate has risen from 1.30% to just above 1.57%, close to its highest reading since mid-June. This level, which is still low by historical standards, is not the issue per se; the problem is the speed of the upward run and its effect on sentiment.
In the near-term, volatility is likely to stick around, especially if disorderly moves in the bond market do not abate. This is an obvious risk for EMFX ahead of tomorrow’sNFP report. On the employment front, investors expect payrolls to rise by 500,000 in September following a soft print in August, but a big positive surprise should not be ruled out due to the strong services sector recovery reflected in ADP data, the expiration of UI benefits and the partial return to school (more parents may have returned to work).
Source: DailyFX Calendar
A better-than-forecast NFP report could seal the deal on a November taper announcement by the Fed and accelerate the transition to higher rates, particularly in the long-end of the curve. This may be a bearish catalyst for MXN, but not for long, as the improving U.S. labor market should be a net positive for the Mexican economy, considering the robust trade relationship between both countries (a strong U.S. labor market also equals higher remittances to Mexico).
In the medium term, the Mexican peso remains in a good position to command strength against the U.S. dollar. Its attractive carry-adjusted volatility, one of the best in the region, should be a source of upside momentum. For reference, Banxico has raised borrowing costs three times this year, to 4.75%, to contain rising inflationary pressures, and may do so twice more before the end 2021.
When it is all said and done, the benchmark interest rate could end the year at 5.25%, the highest level since early 2020. Last but not least, strong oil prices should help stabilize Pemex and improve government finances, a positive outcome for the domestic currency. For these reasons, shorting USD/MXN on sharp rallies may be an attractive opportunity for traders more focused on the long-term outlook.
USD/MXN TECHNICAL ANALYSIS
If bulls maintain control of the market, USD/MXN could head back towards Fibonacci resistance in the 20.87 area. A move above this barrier could darken the Mexican peso outlook and accelerate a move towards 21.64, the 2021 high.
On the flip side, if downside pressure regains impetus, the first technical floor to consider appears near 20.40. If bears push price below this region, USD/MXN could fall towards cluster support near 20.20/20.15.
USD/MXN TECHNICAL CHART
Source: IG Trading Platform
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— Written by Diego Colman, Contributor