U.S. Inflation Data May Spark a Rebound in USD/MXN

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  • USD/MXN has fallen considerably because the November excessive, however the tide could also be about to show amid rising U.S. Treasury yields
  • Expectations that the Fed will probably be aggressive in preventing inflation ought to increase the greenback within the close to time period. That mentioned, all eyes will probably be on the December CPI report within the week forward
  • The Mexican peso, in the meantime, faces one other headwind: uncertainty over financial coverage amid the central financial institution’s new management

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The Mexican peso has strengthened considerably over the previous few months, with USD/MXN falling from 21.55 in late November to twenty.36 someday this week. However, the development might quickly change, because the near-term outlook for the U.S. greenback is wanting more and more bullish on account of financial coverage developments within the United States.

Currently, the market sees the Fed delivering three rate of interest will increase this 12 months, however a fourth hike is slowly creeping into expectations following the discharge of the December FOMC minutes. As a reminder, the minutes confirmed that the central financial institution is leaning in the direction of elevating the federal funds fee sooner or at a quicker tempo than initially envisioned to deal with red-hot inflation. Policymakers additionally appeared on board to start trimming the financial institution’s portfolio quickly after liftoff, signaling that the steadiness sheet runoff might proceed way more shortly than in earlier episodes, a constructive situation for the U.S. forex.

The Fed’s hawkish stance will increase the enchantment of the U.S. greenback within the foreign exchange market in early 2022 by placing upward strain on bonds charges. In reality, yields may stage the following leg greater within the coming days after we get the newest inflation studying. We ought to have that data on Wednesday, when the U.S. Bureau of Labor Statistics releases final month’s report on shopper costs. That mentioned, December headline CPI is predicted to speed up to 7.1% y/y from 6.8% y/y in November, its quickest tempo since 1982.

With inflation displaying few indicators of easing and at multi-decade highs, traders are prone to elevate bets that the Fed will grow to be extra aggressive in pulling again assist to attain one a part of its mandate: value stability. Monetary coverage repricing can quicken the upside strikes in yields (for reference, the 10-year briefly reached 1.8% on Friday, the very best degree in two years), bolstering the dollar and dragging down different currencies whose central banks have but to embark on forceful normalization.

In Mexico, the central financial institution has already raised rates of interest a number of occasions in 2021, however the tightening cycle may grow to be shallower and even come to a screeching halt amid new management. Some traders speculate that Banxico’s new governor, Victoria Rodriguez Ceja, will steer financial coverage in a dovish course, prioritizing financial development over inflation management, however we do not but know a lot to make broad conclusions in regards to the outlook. However, this uncertainty, coupled with Fed developments, ought to weigh on the Mexican peso over the following few weeks.

In phrases of technical evaluation, USD/MXN has corrected downwards in current weeks and is now approaching a important flooring within the neighborhood of 20.25, which corresponds to the 200-day SMA. At the identical time, the 10-day RSI is drifting into oversold territory, a scenario that would pave the best way for a rebound from present ranges within the coming classes. If bulls regain management of the market and the trade fee pivots greater, resistance may be seen on the 2022 excessive close to 20.76, adopted by 20.85, the 50-day SMA.

However, if sellers proceed to push the worth decrease and the 20.25 space is breached decisively, USD/MXN may very well be on its strategy to take a look at rising trendline assist and the October low close to 20.10 in a matter of days.


USD/MXN chart ready in TradingView


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—Written by Diego Colman, Contributor

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