MEXICAN PESO KEY POINTS:
- Danger aversion and broad-based U.S greenback power punish rising market currencies
- The Mexican peso weakens for 2 days in a row towards the buck, however losses could also be transitory
- Mexico’s June CPI knowledge this week will probably be intently scrutinize to find out whether or not Banxico will begin an aggressive tightening cycle
The Mexican peso is sustaining heavy losses on Tuesday, weakening for the second day in a row, pressured by broad-based US dollar power, risk-off sentiment and a big sell-off in oil, a prime export for Mexico (on the time of this writing, USD/MXN is climbing 0.7% to 19.99).
The MXN depreciation, nevertheless, could also be non permanent as decrease treasury charges in the US might assist rising market currencies over the medium time period. This morning, the US 10 12 months yield sunk briefly to 1.3510% within the wake of the June ISM providers knowledge, reaching its lowest stage since late February. As a reminder, activity in the services sector grew for the 13th consecutive month, however decelerated from its latest peak in Might, an indication that restoration could also be shedding some momentum.
Many traders consider that moderating financial progress, coupled with a labor market that has not made enough progress in direction of the Fed’s mandate, might delay any quantitative easing tapering announcement till the top of the 12 months. This situation might depress long-term treasury yields and enhance EMFX throughout the board as charges begin to development greater in lots of of those economies (several EM central banks are beginning tightening cycles to fight inflation).
Turning our consideration to the Mexican economic system, mounting inflationary pressures might lead Banxico to boost borrowing prices at every of its 4 remaining conferences this 12 months. To raised forecast what the central financial institution would possibly do within the second half of 2021, you will need to hold a detailed eye shopper worth knowledge. On this context, INEGI will launch its June CPI report on Thursday. Any signal that inflation isn’t easing might assist cement expectations of aggressive financial tightening, supporting MXN over the medium time period (a tightening cycle in Mexico will improve the MXN carry benefit, boosting its enchantment within the foreign exchange market).
USD/MXN TECHNICAL ANALYSIS
USD/MXN has bounced again from the 19.80 space and now appears to be approaching its 200-day easy shifting common, close to 20.20, a key technical resistance. If bulls handle to push worth above that stage, shopping for strain might acquire momentum and drive the change price in direction of 20.75, the place the June excessive converges with a 12-month descending trendline.
On the flip aspect, if sellers return to the market and USD/MXN pivots decrease, the primary assist seems at 19.80, adopted by the yearly low of 19.55. Additional down, the 19.00 psychological comes into play.
USD/MXN TECHNICAL CHART
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—Written by Diego Colman, DailyFX Market Strategist
Observe me on Twitter: @DColmanFX