Greater U.S. Yields Weigh on EMFX, Banxico on Faucet this Week


  • USD/MXN positive factors floor on Monday, boosted by rising US bond charges
  • Greater yields in the USA may turn out to be a headwind for EMFX if upside strikes are too massive and happen too quickly
  • Banxico’s financial coverage determination this week shall be vital for the Mexican peso, however US Treasury curve dynamics could also be extra related within the close to time period

Most learn: US Dollar Ascending Triangle – FOMC Forecasts Push USD Breakout Potential

USD/MXN began the week on the entrance foot, bolstered by EMFX softness and rising U.S. Treasury charges. Earlier immediately, the US 10-year yield briefly rose to 1.51%, its highest degree since June, supported by better-than-expected US financial knowledge (e.g., August durable goods orders) and expectations that the Fed will quickly begin to withdraw coverage accomodation.

Though the Mexican peso maintains an outsize carry-advantage over the greenback (USD), rising yields in the USA can nonetheless be detrimental to rising market currencies, particularly if the strikes are massive and happen over a brief time period (abruptly). For reference, from mid-February to early March, when the 10-year price shot up from 1.22% to 1.62% in lower than three weeks, the Mexican peso weakened greater than 8%, earlier than regaining floor in the direction of the top of the first quarter.

If the identical dynamics had been to play out in the bond’s market once more, volatility may come roaring again any second, hurting risk-appetite and lifting USD/MXN, at the very least briefly. For that reason, merchants ought to intently monitor sentiment in the direction of EMFX and how the US Treasury curve evolves over the subsequent few weeks.


Specializing in the Mexican financial system, Banxico will announce its September financial coverage determination on Thursday. Consensus means that the establishment will elevate borrowing prices by 25 foundation factors to 4.75% as a way to head off elevated worth pressures and make sure that inflation expectations don’t turn out to be unanchored. The hike, which might be the third consecutive adjustment, is absolutely priced in, so market individuals shall be paying nearer consideration to the financial institution’s steering to find out whether or not or not additional tightening is within the playing cards.

Provided that each headline and core CPI are at present above the three% goal and current upside dangers, the central financial institution may depart the door open for further price hikes this 12 months. A hawkish bias might create a constructive backdrop for the Mexican peso over the medium time period, however is unlikely to forestall losses within the occasion of a serious EMFX downturn on rising yields within the US.


After current positive factors, USD/MXN is tentatively approaching key resistance close to 20.10/20.20, an space the place the 200-day SMA aligns with a long-term descending trendline prolonged from the June 2020 excessive. If worth motion manages to climb above this technical barrier, bulls may push the change price in the direction of 20.50, adopted by 20.85 amid renewed buying-interest (see day by day chart).

On the flip facet, if bears regain management of the market and drive USD/MXN decrease, the primary assist seems at 19.80, close to the August and September lows. A transfer under this ground can be wanted to rejuvenate promoting momentum and goal the 2021 low close to 19.55.


USDMXN technical chart

Supply: TradingView


—Written by Diego Colman, DailyFX Market Strategist

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