USD/MXN rallies to a new cycle-high past 17.8000 ahead of Banxico rates decision

• USD/MXN rallies to new cycle highs, post 17.8000 on risk aversion, strong USD.
• The Federal Reserve’s hawkish rhetoric and a US government shutdown looming spurred flows toward the safety status of the USD.
• USD/MXN traders eye Banxico's monetary policy decision, with estimates to hold rates at 11.25%.

The Mexican Peso (MXN) continues to weaken against the US Dollar (USD) during the North American session after hitting a daily low of 17.4748. Broad USD strength on risk aversion, due to some factors, underpins the USD/MXN, which is trading at 17.7837, though it has hit a new cycle high at 17.8161.

Mexican Peso weakens as looming US government shutdown and hawkish Federal Reserve rhetoric elevate US Treasury bond yields and the Greenback

Sentiment remains sour, as portrayed by US equities drifting lower. A partial shutdown of the US government looms, while hawkish rhetoric by the Federal Reserve continues to underpin US Treasury bond yields and, consequently, the Greenback.

The US 10-year benchmark note rate sits above 4.63% and has gained nine and a half basis points so far in the session, while the US Dollar Index (DXY), which tracks the performance of a basket of six currencies versus the Greenback, climbs to yearly highs of 106.82, with buyers eyeing November 30, 2022, high of 107.19.

Minnesota’s Fed President Neil Kashkari commented the risk of interest rates might have to go higher lurks while adding that consumer spending remains robust. Kashkari said that although there is progress in inflation, he remains unsure if the Fed is restrictive enough.

On the data front, the US Department of Commerce showed that Durable Goods Orders for August rose 0.2% MoM, exceeding estimates and the prior month’s -5.6% plunge. Excluding Transports, orders climbed 0.4% MoM, above projections and July’s 0.1% increase.

On the Mexican front, the Trade Balance in August posted a deficit of -1.377 billion dollars in non-adjusted terms, while seasonally adjusted posted a $131 million trade deficit, compared to July’s surplus of $532 million.

Aside from this, the Bank of Mexico (Banxico) will release its monetary policy decision on Thursday, in which the central bank is expected to hold rates unchanged at 11.25%, according to a Reuters poll of 20 analysts. The central bank has kept rates at 11.25% since March 2023 while inflation decelerates. The latest Consumer Price Index (CPI) report for the first half of September witnessed a drop to 4.4%, its lowest since March 2021.

USD/MXN Price Analysis: Technical outlook

The daily chart shows the pair has extended its gains to a new cycle high, which could open the door for further upside, but buyers must reclaim the 200-day moving average (DMA) at 17.8511, which could pave the way for a test of 18.0000. A breach of those two levels would put into play a rally towards the April 5 swing high at 18.4010, followed by the March 24 daily high at 18.7968.