USD/MXN FORECAST: MILDLY BEARISH
- Banxico’s rate hike surprise may help consolidate expectations that a tightening cycle has started
- Positive risk-sentiment and an attractive carry are likely to benefit the Mexican peso
- USD/MXN short-term bias points lower
There are not many of relevant risk events in Mexico’s economic calendar next week. The June manufacturing PMI, to be published on July 1st, will likely receive some scrutiny, but the future path of Banxico’s monetary policy, in light of its recent rate hike surprise, and the NFP release in the U.S. will dominate market discussion and set the tone for USD/MXN price action.
This past Thursday, the Mexican monetary authority charted a new course and unexpectedly raised its benchmark interest rate for the first time since 2018, increasing it by 25 basis points to 4.25%, a move that triggered a massive Mexican peso rally against the greenback.
Banxico’s hawkish language, coupled with its decision to lift borrowing costs on fears that the upward trend in consumer prices could persist longer than expected and contaminate inflation expectations, has led some investors to start discounting a full-fledge tightening cycle, with a 25bp rate hike possibly in the cards at each of the remaining meetings in 2021 (August, September, November, December).This implies four rate hikes left this year.
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The prospect of aggressive monetary policy in Mexico, at least relative to the Federal Reserve’s stance, may further support the Mexican peso in the short term, especially if risk appetite remains elevated and volatility subdued. Normally, in this era of historically low rates, when the latter two conditions are present, the search for yield trade is maximized. Obviously, this tends to benefit the Mexican peso due to its carry advantage.
For the reasons outlined above, the balance of risks for the USD/MXN is skewed to the downside. In this context, the price could soon probe its 2021 lows near 19.55 as selling pressure gains strength, mainly in response to Banxico’s hawkish pivot.
USD/MXN TECHNICAL ANALYSIS
Following the week’s retracement, USD/MXN has fallen below both its 200-day and 50-day simple moving average , a sign that sellers may temporarily be in control. That said, with the latest pull-back, price seems to be heading towards its 2021 low near 19.55, a key technical support region. It is important to monitor this area because if the pair slides below it, bears may unleash a larger sell-off and trigger a move towards the 19.00 psychological mark. Alternatively, if selling pressure weakens and USD/MXN reverses higher, the first resistance comes at 20.25, followed by 20.75 (in this area, the June high converges with a 12 month trendline resistance).
USD/MXN TECHNICAL CHART
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—Written by Diego Colman, DailyFX Market Strategist
Follow me on Twitter: @DColmanFX