Mexican Peso Forecast: Powell Paves The Way For Weakness In The Near Term

USD/MXN Weekly Forecast: Bearish on dovish Fed

  • Powell’s dovish speech at Jackson Hole Symposium weighed on the US dollar and boosted risk-assets across the board heading into the weekend (UDN).
  • The Fed’s decision to avoid dropping heavy hints about its taper timeline will likely depress US treasury yields and support the Mexican peso in the near term.
  • USD/MXN could break below the 20.00 psychological mark in the coming days as traders cut long exposure to the greenback.

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The Federal Reserve chairman’s speech at the Jackson Hole virtual summit triggered a positive response in the Mexican peso and risk-assets across the board while sending US Treasury rates lower. Although Jerome Powell indicated that the “substantial further progress” criteria has been met for inflation and that it could be appropriate to begin tapering accommodation this year, he was vague and did not signal an announcement was coming at the September FOMC meeting.

Powell's lack of commitment to a "taper timetable" and his pledge to carefully assess incoming data and evolving risks before making a decision suggest that there’s no consensus within the central bank to begin withdrawing stimulus imminently and that policymakers may be inclined to wait a bit longer before pulling the trigger.

With the Fed still dovish and more patient than ever as it waits for the labor market to recover further, long-end US Treasury yields are likely toremain depressed in the short-term, a scenario that would support higher-yielding currencies such as the Mexican peso, which has one of the most attractive carry-adjusted-for-volatility in the EMFX space. For this reason, USD/MXN could stay defensive and possibly break below the 20.00 psychological mark in the coming week.

While we may see further declines in USD/MXN in the final stretch of the month, it is important to continue to monitor economic data, as new information on the macroeconomic front may change the market narrative. That said, next Friday the US Labor Department will release the August nonfarm payrolls report (NFP). Traders expect to see 750,000 new jobs, with forecasts ranging from 450,000 to 950,000. Generally speaking, anything close to a “print of 1 million” should suffice to revive US dollar buying interest and keep alive a September taper announcement.

USD/MXN Technical Analysis

Heading into the weekend, USD/MXN bears regained control of the market and subsequently drove the exchange rate close to a key support area near 20.20/20.10, where the August 25 low converges with the 200-day moving average. If sellers manage to push prices below this critical floor in the coming days, as more traders turn sour on the US dollar, there is scope for a move towards 19.80 in the short-term. On the other hand, if USD/MXN pivots higher unexpectedly, the first technical resistance to consider appears at 20.45/20.50. An ascend above this barrier would make the June high at 20.75 the immediate upside target.

USD/MXN Technical Chart


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