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Mexican Peso Outlook: USD/MXN Strongly Correlated to Bond Yields

Mexican Peso Outlook: USD/MXN Strongly Correlated to Bond Yields

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USD/MXN Forecast: Bullish


The last two weeks have been the most volatile and exciting in USD/MXN in a good few months. The recent moves in bond yields have caused the US Dollar to perk up from its recent lows, hurting high-yield risk-on currencies like the Mexican Peso, causing USD/MXN to shoot up to 21.62, before coming back down again as yields saw some corrective pressure these past few days, leaving the pair just above 20.50.

US 10Y Yield and DXY Daily Chart

US 10Y and DXY Chart

USD/MXN Daily chart


It’s hard to find much to say about USD/MXN other than its reaction to the bond market given that it seems really the only fundamental driving force at the moment. The Covid-19 situation continues to be a grave concern in Mexico and the economic outlook doesn0t seem to be improving anytime soon, but the pair is likely to continue trending downwards if the US Dollar depreciates on the back of falling yields, and the opposite would happen if yields continue to rise.

From a technical standpoint, the correction seen this past week seems slightly overstretched, something similar to what had happened the previous week when the bullish run had run out of steam, so a new break above 21.00 may be in order in the next few days. I’m not surprised to see that USD/MXN stands where it currently is, mostly because I had been hinting that the failure to continue testing the descending support line was a clear sign that buyer momentum was picking up.

I am slightly surprised to see how the upside correction gathered pace so quickly and broke past key Fibonacci levels without issue, but I guess bulls had been gathering for a while. 21.62 is a good shout as a resistance area and I expect it to continue attracting selling pressure if bullish momentum picks up again, although we may see some initial resistance around the 61.8% Fibonacci (21.19) this time around.

Fibonacci Confluence on FX Pairs

If this push higher in bond yields fails to materialize, it may be safe to expect the US Dollar to head lower again, which could bring a possible fall below 21.50 for USD/MXN, at which point the 50-day simple moving average could offer some short-term support at 20.35 before the 76.4% Fibonacci (20.18) comes into play again.

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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