Mexican Peso Gains Ahead of Jackson Hole. Will the Fed Rock the Boat for EMFX?

MEXICAN PESO OUTLOOK:

• USD/MXN exploded higher last week on delta-variant worries, but has pulled back in the last couple of days amid a rebound in risk appetite
• This week, the Fed’s Jackson Hole Symposium will be the center of attention
• If the Fed signals a tapering announcement will not come in the next couple of months, but towards the end of the year, US Treasury yields could stay depressed, boosting EMFX

FX Week Ahead - Top 5 Events: Mexico GDP; US Durable Goods Orders; ECB Meeting Minutes; US Michigan Confidence; Powell’s Jackson Hole Speech

Last week, USD/MXN exploded higher, surpassing its 200-day moving average and rising to its highest level in four weeks (~20.45) amid widespread risk aversion on delta-variant concerns as more countries began to re-impose lockdowns to contain the spread of virus. With the implementation of containment measures in large economies such as China, the global reflation story weakened, temporarily weighing on the EMFX.

This week, however, USD/MXN has pulled back as risk appetite appears to have rebounded following the FDA's decision to fully approve the Pfizer-BioNTech's coronavirus vaccine for people over the age of 16. Investors believe that full approval will encourage companies, schools and local governments to mandate vaccines to compel skeptical individuals to get the jab. With more people inoculated, the virus nightmare may end sooner, an outcome that will restore consumer confidence and boost economic activity. Generally speaking, any pickup in U.S. growth can be seen as a bullish catalyst for the Mexican peso, as Mexico sends close to 80% of its exports to its northern neighbor.

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Putting the pandemic situation aside for a moment, the main event to watch this week will be the Fed's Jackson Hole Symposium (the summit has now moved to a virtual venue). Expectations are mixed following the hawkish July FOMC minutes, although a plurality of traders believe the central bank will refrain from "rocking the boat" and making any major announcements on its quantitative easing exit strategy amid downside risks posed by the delta variant.

On balance, if Powell advocates patience and signals that the decision to taper the asset purchases program will not come in the next couple of months but towards the end of the year, as long as the economy continues to improve, US Treasury yields could remain depressed for the remaining of the quarter, a scenario that will support high-yielding emerging market currencies. If the latter scenario plays out, the Mexican peso is likely to gain ground against the dollar in the near term. This means that the path of least resistance for USD/MXN may be lower heading into September.

USD/MXN TECHNICAL ANALYSIS

USD/MXN has started to pull-back this week but remains above its 200-day moving average. For bears to retake decisive control of the market, we would need to see a move below 20.25/20.10. If price manages to fall below this technical support area, sellers could drive the pair towards 19.80 and then 19.55, the 2021 low. Alternatively, if USD/MXN bounces back, the first resistance appears at 20.45. A rise above this barrier will rejuvenate buying momentum and could propel the exchange rate towards the June high in the 20.75 region.

USD/MXN TECHNICAL CHART

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---Written by Diego Colman, DailyFX Market Strategist