USD/MXN soars on strong US jobs data fueling Fed hike estimates post July’s decision

• USD/MXN rose more than 1% on Thursday after US Initial Jobless Claims data came in better than expected, with claims edging lower.
• Jump in US Treasury bond yields, with the 2-year note rate finishing at 4.845% and the 10-year note yield at 3.856%, also underpins the US Dollar.
• Mexican Retail Sales for May unexpectedly declined by 0.5% MoM, missing estimates of a 0.3% increase and decelerating YoY from 3.8% in April to 2.6% in May.

USD/MXN surged on Thursday as market sentiment turned cautious ahead of the US Federal Reserve (Fed) next week’s monetary policy meeting and on solid US jobs data. Expectations are increasing that the Fed could tighten conditions past the July meeting, causing a repricing of monetary policy. Hence, the USD/MXN is trading at 16.8785, gaining more than 1% on Tuesday, with buyers eyeing the 17.00 figure, in the near term.

Stronger-than-expected US jobs data underpin the US dollar, pressuring the Mexican peso and causing USD/MXN to target the 17.00 level

The USD/MXN recovered lost ground due to Initial Jobless Claims for the last week coming below estimates of 240K, at 228K, and well below the prior’s report of 240K, signaling that expected lay-offs of US companies are not happening.

The data triggered a jump in US Treasury bond yields, consequently underpinning the US Dollar (USD). The front end of the curve, particularly the US 2-year Treasury note, gained seven basis points (bps), finishing at 4.845%. The US 10-year benchmark note yielded 3.856%, up ten bps, a tailwind for the greenback as mentioned above, which posted gains of 0.86%, as shown by the US Dollar Index (DXY).

In addition, market participants are reassessing a possible rate hike after the Fed’s meeting next week, as shown by the CME FedWatch Tool. The chances lie at 32.2% for a 25 bps, compared to 19.8% odds a week ago.

Other data showed the US housing market decelerated, as Existing Home Sales dived -3.3% in June, with sales coming at 4.16M beneath the 4.3M in May and missing 4.2M forecasts.

In the case of the Mexican Peso (MXN), the emerging market currency lost traction as the USD/MXN soared on the US data release, as the pair printed a new weekly high of 16.9145. Retail Sales for May in Mexico plunged -0.5% MoM, beneath estimates of a 0.3% expansion, while annual-based numbers decelerated from 3.8% in April to 2.6% in May.

Given the backdrop, if the Mexican economy shows soft data, that could spur outflows from the emerging market currency. That, alongside risk sentiment, could be factors vs. the MXN, as sied by analysts of Capital Economics, which noted that “Though the Mexican peso stands out among major Latin American currencies as the one that’s performed most poorly today, it’s basically a reflection of the fact that the peso seems to be quite vulnerable to deterioration in risk appetite.”

USD/MXN Price Analysis: Technical outlook

The USD/MXN daily chart shows the downtrend remains intact but at the brisk of turning neutral. To achieve that, buyers would need to regain control and lift the USD/MXN above the 20-day Exponential Moving Average (EMA) at 16.9596, followed by the 17.00 figure. Even though that would ease downward pressure on the USD/MXN, buyers must reclaim the 50-day EMA at 17.2387, followed by the May 17 daily low turned resistance at 17.4038, to pave the way for a recovery. Conversely, if USD/MXN sellers keep the pair below 17.00, that could exacerbate a drop towards 16.5000, followed by the October 2015 low of 16.3267.