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USD/MXN Slides on Lower US Treasury Yields, Market Focus Turns to NFP Data

USD/MXN Slides on Lower US Treasury Yields, Market Focus Turns to NFP Data

Diego Colman, Strategist


  • The Mexican peso appreciates at the start of the week as US treasury yields continue to lose ground in the fixed income market
  • The path of least resistance for USD/MXN appears to be lower on the back of the dovish Fed
  • In this article we talk about the most important technical levels for USD/MXN in the short term

Most read: Powell Paves the Way for USD/MXN Weakness in the Near Term

USD/MXN fell moderately and accumulated further losses at the start of the week after Friday's big drop triggered by the Fed's dovish tone at the Jackson Hole Symposium. As a reminder, at the summit, Jerome Powell decoupled taper from liftoff, but more importantly, he did not commit to a timetable to begin reducing asset purchases, a sign that policymakers may be inclined to wait a bit longer before starting to withdraw accommodation.

The central bank chairman’s dovish message has led investors to conclude that a “taper announcement” will not occur at the September FOMC conclave, but towards the end of the year at the November or December meeting when the labor market is in a much better position. These new expectations have sent US treasury rates lower at the long end of the curve, with the US10Y yield dropping from 1.35% to 1.28% in the last couple of days.

With treasury rates in retreat, the US dollar may fall further in the near term, especially against the higher-yielding Mexican peso, one of the currencies with the most attractive carry-adjusted-for-volatility in the EMFX complex. This means the USD/MXN could potentially lose more ground and easily break below the 20.00 psychological mark as we enter the new month.

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While the path of least resistance for USD/MXN appears to be lower, there are risks to the bearish outlook that traders should be aware of. That said, a key threat this week is US economic data, specifically the August employment (NFP) report set to be released Friday just ahead of Labor Day Holiday (US markers will close on September 6th for Labor Day). Traders expect to see 750,000 new jobs, with forecasts ranging from 450,000 to 950,000. Any figure close to one million jobs could make the dollar shine, while anything below 500K should weigh on the greenback and boost EMFX.

In gauging the potential market response, it should be noted that liquidity is likely to be considerably lower heading into the holiday weekend, which coincides with the end of the summer/holiday season. A low liquidity scenario may produce a USDMXN outsize reaction if NFP results surprise in either direction, but the move may be larger if employment gains blow out estimates, as this may prompt traders to recalibrate expectations and rekindle bets of a September taper announcement.

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In the last few days, USD/MXN has dropped towards a key support in the 20.20/20.10 area, where the August 25 low converges with the 200-day moving average.If bears maintain control of the market and drive price below this critical floor, we could see a move towards 19.80 in short order.

On the flip side, if USD/MXN pivots higher unexpectedly, the first technical resistance to consider appears at 20.45/20.50. An rise above this barrier would put the June high at 20.75 in focus.

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USDMXN technical chart


---Written by Diego Colman, DailyFX Market Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.