USD/MXN rallies sharply above $18.80 on SVB crisis, Fed rates repricing

The Mexican Peso (MXN) depreciates the most against the US Dollar (USD) on fears of a possible contagion after the failure of the Silicon Valley Bank (SVB). Over the weekend, the state seized New York’s Signature Bank amidst the need to stabilize the financial system. At the time of writing, the USD/MXN is trading at 18.8246, above its opening price by 1.85%.

The crisis in regional banks in the US weaken the Mexican Peso

The domestic crisis in the banking sector in the United States (USD) caused a change in market sentiment. The winner is the precious metals segment, with Gold breaking the $1900 barrier. Wall Street turned positive, except for financials, which are losing as US Treasury bond yields plummet. US Federal Reserve (Fed) interest rate expectations lie at a 25 bps hike in March at a 64.2% change, and for no change, at 35.8%. Traders speculate that the current crisis in the Regional Bank segment could keep the Fed from tightening monetary conditions.

The US 2-year Treasury bond yield has dropped 50 bps, the most since the Global Financial Crisis (GFC) in 2008, barely above the 4% threshold. The 10-year note rate sits at 3.466%, down 23 bps.

The CME FedWatch Tool has the Federal Funds Rate (FFR) peaking at 4.75% - 5.00%, with traders expecting rate cuts in June, September, and December.

As a consequence, the USD/MXN appreciates in uncertain scenarios. Large capitals, fearing a crisis, move their assets out of emerging markets and return to the US Dollar or Gold.

Let’s remember that Jerome Powell, the head of the Federal Reserve, testified before the Senate’s finance committee and the House of Representatives. Powell said that interest rates could rise to higher levels than projected. He added a faster rate increase, depending on economic data.

Given this scenario, the USD/MXN broke important technical ceilings, such as the 50 and 100-day Moving Average, at 18.6546 and 19.010, respectively. However, it has fallen below $19.00, having that barrier as the first top.

USD/MXN Technical analysis

From a technical point of view, the USD/MXN could consolidate between the 50-day and 100-day Moving Averages (MM), at 18.6549 and 19.00, respectively. The current trend has turned neutral. However, a break above $19.00 would open the way to the February 6 high at 19.2905 units. With a break of this area, the USD/MXN pair could reach the 200-day Moving Average (MM), at 19.4187.

Momentum indicators such as the Relative Strength Index (RSI) have turned bullish above 50, while the Rate of Exchange (RoC) shows increased demand for dollars.

On the other hand, a drop below the 50-day MA at 18.6555 could cause a decline toward the 20-day MA at 18.3821 before testing the $18.00 barrier.