USD/MXN rallies near the 18.00 psychological barrier amidst Mexico’s asset nationalization

• USD/MXN reaches a three-week high amid actions by the Mexican Government, stirring uncertainty in the business community and resulting in outflows from the Mexican Peso.
• Despite positive talks between President Biden and House Speaker McCarthy, US debt-ceiling agreement remains elusive, casting a shadow over US economic data and causing a downturn in US equities.
• Mexico’s recent nationalization actions generated concerns among the business community and negatively impacted USD/MXN recovery.

USD/MXN reached a new three-week high at the brisk of the psychological 18.0000 barrier, at around 17.9976, sponsored by several factors. Firstly, the discussion of the US debt ceiling keeps investors on their toes, spurring a flight to a safe haven. Also, uncertainty in the business community in Mexico, as the Government commenced to seize private lands and railroads, triggered outflows from the emerging market currency. At the time of writing, the USD/MXN is trading at 17.9489, up 0.34%.

Flight to safety bolstered USD/MXN, Mexico’s Government actions stirred uncertainty

US equities continued to trend downward as the US debt-ceiling discussions have overshadowed US economic data. The prevailing concern over raising the national debt ceiling has cast a long shadow over other discussions, despite positive assertions by US President Joe Biden and House Speaker Kevin McCarthy that their Monday talks were fruitful. However, the path to a definitive agreement still seems winding and far off.

Reflections of the uncertain political environment in the US are underpinning the US Dollar (USD) as yields on US Treasury bonds continue to climb, with the 10-year bond yield hitting 3.726%. This creates an adverse environment for the recovery of USD/MXN, which remains under pressure amidst domestic issues in Mexico.

Over the weekend, news headlines said that the Mexican Government headed by President Andres Manuel Lopez Obrador, known as AMLO, “nationalized” a section of track in the state of Veracruz, operated by Grupo Mexico, a private company. That weighed on the company’s stock, as its main shareholder German Larrea, one of the bidders for Citigroup’s retail branch in Mexico, said that he would withdraw from the bid, saying that “I’m not going to pay 7,000 million dollars for something they can take away from me tomorrow,” according to a Tweet from Dario Celis, a Mexican reporter from El Financiero.

In the meantime, on Monday, AMLO expropriated privately-owned land in the state of Mexico to build a commuter train three days after the seizure of a part of a rail line owned by German Larrea’s Grupo Mexico. AMLO’s recent decisions are generating worries amongst the business community in Mexico, as AMLO is contradicting campaign promises that he would not expropriate private property.

Given the backdrop, the USD/MXN had weakened more than 3% since last Tuesday, when the pair printed a new multi-year low of 17.4038. The pair, on its rally, reclaimed the 20-day EMA at 17.8007 and is closing to challenge the 18.0000 psychological figure.

Turning to the data front in the United States, final readings for S&P Global PMIs for May are of particular interest. A surprising dip in the Manufacturing Index to 48.5, contrary to estimates and the previous reading of over 50, is offset by a rise in the Services Index to 55.1. The Composite Index landed at 54.5, and the surge in services slowed its advance.

US New Home Sales have soared to a level unseen in 13 months. With a 4.1% rise or 683K units in April, it marked the most substantial figure since March of the previous year, as the US Commerce Department reported.

Aside from this, USD/MXN traders will remain focused on upcoming events, like the Mid-month inflation report from Mexico, with core CPI estimated to ease from 7.75% YoY May 2022 to 7.49%, as projected by analysts. Regarding the US, the minutes of the May meeting of the Federal Reserve (Fed) will be revealed.

USD/MXN Price Analysis: Technical outlook

USD/MXN has shifted neutrally biased, as the Mexican Peso (MXN) has weakened for six days in a row. Upside risks lie at the 50-day EMA at 18.0167, a tick above the psychological 18.0000 figure; once cleared, that would open the way for further gains. The USD/MXN first resistance level would be the April 27 high at 18.1968, followed by the confluence of April 5 and the 100-day EMA at around the 18.3604-18.4010 area. Conversely, if USD/MXN drops below 17.7994, where the 20-day EMA lies, a re-test of the YTD low of 17.4038 is on the cards.