USD/MXN rallies above 17.3000 as US bond yields rise, ahead of US NFP

• USD/MXN hits a two-month high at 17.4256, gains in the week by almost 4%.
• Steady US Initial Jobless Claims underpins the US Dollar, despite a soft ISM Non-Manufacturing PMI.
• The surprise rate cut by Brazil’s Central Bank could set a precedent for other Latin American central banks, yet the Bank of Mexico upholds its restrictive monetary policy.

The Mexican Peso (MXN) plunges sharply against the US Dollar (USD), accumulating losses of 2% on Thursday and 4% in the week spurred by higher US Treasury bond yields and traders beginning to unwind the carry trade. Additionally, a surprise rate cut of 50 bps by the Brazil Central Bank could be seen as setting the tone for other Latin American central banks. At the time of writing, the USD/MXN is trading at 17.3617 after hitting a daily low of 16.9800.

The Mexican Peso plunges against the US Dollar, buoyed by robust USD performance and negative sentiment following the Fitch downgrading US creditworthiness

Wall Street is trading in negative territory as investors’ mood remains depressed, courtesy in part of Fitch’s downgrade to US creditworthiness. Also, a strong US Dollar (USD) across the board underpins the USD/MXN higher, reaching a two-month-high of 17.4256 early in the North American session, as data from the United States (US) crossed the wires.

Initial Jobless Claims for the week ending July 29 rose by 227K aligned with estimates, the US Bureau of Labor Statistics (BLS) reported. The report shows the labor market is easing, but the trend remains uncertain, with mixed releases during the last couple of months with data depicting the opposite.

In other data, the ISM Non-Manufacturing PMI for July, also known as Services PMI, came at 52.7, below 53 forecasts and 53.9 in June. Digging into the data, a gauge of paid prices by services businesses rose to 56.8 from 54.1 in June, portraying the stickiness of inflation in services activity.

Aside from this data, Friday’s US Nonfarm Payrolls report for July is expected to deliver a clear reading of the labor market. Any upward surprises could put on the table additional rate hikes by the US Federal Reserve (Fed). Otherwise, the Fed could take a cautious approach ahead of the September monetary policy meeting.

Another cause behind the USD/MXN is the rise in US Treasury bond yields. The 10-year benchmark note gains eight basis points, and sits at 4.171%, its highest level since November 2022.

In the meantime, Richmond’s Fed President Thomas Barkin crossed the wires, said that inflation is too high, and that “ last month’s inflation read was a good one, and I hope it is a sign.”

Aside from this, the Brazil Central Bank delivered a dovish surprise, cutting rates 50 bps to 13.25%, from 25 bps estimated by analysts, delivering dovish forward guidance saying, “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.”

That opposes the Bank of Mexico (Banxico) Deputy Governor Jonathan Heath, who said on Wednesday, “restrictive monetary policy stance should be held for a while to wait for it to have effect,” expressed in a Banorte podcast interview. Nevertheless, he said interest rates, which the TIIE stands at 11.25%, are “correct” even if the Fed hikes again.

USD/MXN Price Analysis: Technical outlook

The USD/MXN is staging an outstanding recovery, hitting 17.4256 as its daily high, reaching a new two-month high, but failed to crack essential resistance found at May 17 daily low at 17.4038. With a daily close above the latter, the USD/MXN could rally towards the 100-day Exponential Moving Average (EMA) at 17.5273, with buyers eyeing May 24 swing high at 17.9798, followed by the 200-day EMA at 18.1520. Conversely, if USD/MXN drops below 17.0000, that could exacerbate a re-test of the year’s lows at around 16.6238.