USD/MXN drops sharply as bears eye 20.1500 ahead Banxico’s meeting

Despite a risk-off market mood in the financial markets, courtesy of Russia – Ukraine tensions and hawkish Federal Reserve expectations of rate hikes larger than 25 bps, the Mexican peso rally has extended to seven consecutive days. At the time of writing, the USD/MXN is trading at 20.1706, down some 0.53%, reflecting the peso strength.

Risk aversion is back again. European and US equities are falling, while the greenback stays firm, as shown by the US Dollar Index, up 0.28%, at 98.701. US Treasury yields are almost flat, as shown by the 10-year T-note, down for the first time in the week one basis point, at 2.366%.

Geopolitical jitters back at the forefront

Ukraine’s President Zelensky said that talks with Russia are confrontational and complex. At the same time, the Russian Foreign Minister Lavrov commented that NATO’s eastward expansion continues irrespective of whether a particular nation is a member. Of late, Russian President Vladimir Putin said they intend to use Russian roubles when selling gas to non-friendly countries, which caused a jump in oil prices, benefiting the peso prospects due to the Mexican economy being dependent on crude exports.

Banxico’s to hike 50 bps – Rabobank

“Banxico will announce its latest rate decision on Thursday, March 24th, and we expect another 50bp hike taking the policy rate up to 6.50%. This is expected by the majority of analysts, and the market is fully priced for a 50bp move.”

The analysts at Rabobank added that “last week’s FOMC and Russia’s invasion of Ukraine has led us to revise our forecast to factor in another two 50bp increases and two more 25bp increases, taking the policy rate up to 8.00% by year-end.”

Fed speaking continues

The US economic docket featured more Fed speakers. Earlier, Fed Chief Powell talked about digital currencies, leaving monetary policy aside. Meanwhile, Cleveland Fed President Loretta said that the Fed would need to do some 50 bps moves this year while favoring frontloading rate hikes to better position themselves for how the US economy evolves in the second half of 2022. She further added that “I have no concerns that rate increases are going to push the US economy into recession.”

Putting this aside, the US New Home Sales for February rose 0.772M  lower than the 0.81M estimated.

USD/MXN Price Forecast: Technical outlook

In the near term, the USD/MXN is downward biased. On its way south, it has broken several support levels, like the 20.3117 February 25 daily low, and at press time, it is approaching February 23 daily low at 20.1558.

If the USD/MXN clears the latter, USD/MXN’s next support would be 20.00, followed by June 25, 2021, a daily low at 19.7049.