Volatility in the EMFX space has been high following the September FOMC meeting, as the sudden and outsized rise in U.S. bond rates has bolstered demand for the US dollar, while simultaneously spurring some risk aversion. During this period, USD/MXN briefly spiked from 20.05 to 20.90, although this week it has started to retreat towards 20.55 as yields have fallen from their recent peak, with the 10-year rate dropping from 1.636% to 1.525% in the last three days.

Yesterday, the Fed's minutes from its conclave last month showed that policymakers could begin to slow the pace of asset purchases as soon as mid-November, ending the process around the middle of 2022. Given that the message has been thoroughly choreographed by the central bank, the minutes produced a muted reaction across asset classes, a sign that traders and investors have completely discounted the start of policy normalization.

In any case, as the Federal Reserve’s monetary policy becomes less accommodative, yields should resume their ascent, but with “tapering expectations” priced in and signs that inflation is peaking, the upward move should be less aggressive than seen recently. Although not ideal, the Mexican peso should be able to withstand the steepening of the U.S. Treasury curve if the process unfolds in an orderly fashion, chiefly because the Latin American currency maintains an attractive carry advantage over the greenback and Banxico is set to tighten policy twice more in 2021, after having hiked already three times this year.

Aside from bond market dynamics, short-term traders should also keep an eye on investor sentiment as earnings season gets underway on Wall Street. So far, results have been mostly positive, especially for big banks, which have posted strong revenues and issued constructive guidance. If companies in other sectors also manage to beat the street’s consensus and provide an upbeat outlook on earnings, concerns about the slowing economy could begin to blow over, boosting appetite for riskier currencies such as the Mexican peso (the Mexican economy should benefit from a solid recovery in the U.S. given the strong trade relationship between both countries).

USD/MXN TECHNICAL ANALYSIS

After failing to clear Fibonacci resistance near 20.85/20.90 three times in the last few days, USD/MXN has started to retrace towards 20.55 amid fading buying interest, but price action remains skewed to the upside following the development of a golden cross in the daily chart. That said, for downside pressure to return, the golden cross mentioned before would have to reverse and give way to a death cross, in which case we could see a pullback towards 20.45/20.40. Traders should look for further weakness in the event of a move below that floor, with the next support seen around 20.20, followed by 19.85.

On the other hand, if USD/MXN resumes its ascent more decisively, the first resistance to watch out for appears at 20.85/20.90. If bulls manage to push the currency pair above this solid barrier, there would be room for a rally towards the yearly high at 21.64, but this scenario seems far-fetched at this point, especially with risk appetite stabilizing.

USD/MXN TECHNICAL CHART

(Click on image to enlarge)

Source: TradingView