USD/MXN rises above the 100-DMA as risk aversion fuels USD gains

• USD/MXN pair gained 0.88% to trade at 17.3270 after the Bank of Mexico slashed its currency hedge program, adding volatility to the currency pair.
• Fueled by disappointing PMIs from China and the Eurozone, risk aversion drives investors toward the US Dollar and boosts US Treasury bond yields.
• Upcoming US ISM Non-Manufacturing PMI and S&P Global Services PMI data could influence the Greenback and Federal Reserve’s interest rate decisions, with readings expected to show a minor slowdown.

The Mexican Peso (MXN) extended its slide for four straight days against the Greenback (USD) after the Bank of Mexico (Banxico) decided to slash its currency hedge program, designed to stabilize currency fluctuations that could trigger volatility in the USD/MXN pair. That, alongside risk aversion, hurts the emerging market currency, as the pair trades at 17.3270 and gains 0.88% at the time of writing.

Mexican Peso slides for the fourth consecutive day amid global economic concerns and rising US treasury yields

Risk aversion due to the latest results of PMIs from China and the Eurozone (EU) worsened the global economic outlook. Hence, traders seeking safety flock towards the Greenback (USD), while US Treasury bond yields rose.

China revealed its Caixin Services PMI expanding at a lower rate than estimates of 53.6 at 51.8 and below the previous month’s reading of 54.1. In the meantime, data from the United States showed that Factory Orders decreased -2.1% less than market expectations of a -2.5% plunge after four consecutive months of increases, as the US Department of Commerce revealed.

In the meantime, Fed speakers crossing newswires boosted the US Dollar. Christopher Waller, a Fed Governors said the Fed has space to decide its next interest rate decision, while Cleveland’s Fed President Loretta Mester said the Fed would not continue to tighten monetary policy until inflation hits 2%, nor wait until it gets there, to lower rates.

Meanwhile, US Treasury bond yields are persistently on the rise, notably the 10-year Treasury bond yield, which has surged by six basis points to reach 4.261%. This upward movement is favorably impacting the USD/MXN pair. The US Dollar Index (DXY), which gauges the US Dollar’s performance against six major currencies, has shown significant gains of 0.61%, reaching 104.794. This marks its highest point since March 13, 2023.

In the upcoming events, the release of the US ISM Non-Manufacturing PMI for August is anticipated to show a minor slowdown from 52.7 to 52.5. Similarly, the S&P Global Services PMI is likely to exhibit a comparable trend, with estimates at 51, compared to July’s 52.3. If both readings align with expectations, this could exert pressure on the US Dollar. Such outcomes might reinforce the Federal Reserve’s pause in September and diminish the likelihood of an additional interest rate increase in November.

USD/MXN Price Analysis: Technical outlook

The daily chart portrays the pair as neutral biased, though the USD/MXN exchange rate sits above the 100-day Moving Average (DMA); a daily close above the latter could put into play a challenge of the crucial May 17 swing low-turned resistance at 17.4039. Once cleared, the pair could edge towards the 18.0000 figure. Downside risks would emerge if the pair drops below the 17.0000 mark.