Emerging currencies had their worst day in months on Thursday, with all the Mexican Peso resulting in the losses because rising bond yields tore through LatAm assets.

MXN AGAINST A BASKET OF CURRENCIES (USD, GBP, EUR, JPY)

USD/MXN rose to its highest level in 3 weeks despite better than expected fourth-quarter growth numbers for Mexico, highlighting that bond yields are running the show for now. And higher prices are likely still to come, placing bond-sensitive currencies like the Mexican Peso in danger, especially since high domestic interest rates have produced the Peso more vulnerable to global borrowing costs.

The Mexican currency was already in a weak position coming from the back of last week, even with electricity disruptions from Texas affecting local factories and families, and earning stronger state control over the electricity market.

The U.S. 10-year Treasury yield appeared at a top of 1.6140 overnight on Friday following the newest 7-year auction left traders with more bonds than expected in their hands, pointing at further weak demand, as vaccination programs and raise fiscal and monetary stimulus have abandoned investors anticipating a faster economic recovery and rising inflation expectations. This sharp rise in returns has put downward pressure on stocks, releasing a general negative market sentiment, which has affected risk-on assets such as the Mexican Peso, whilst traditional safe-haven assets like the US Dollar are being bought.

I expect this to be the overriding theme in global markets following week, meaning that USD/MXN will be very likely to see further buying pressure if yields continue to rise.

USD/MXN DAILY CHART

Looking at the daily chart, USD/MXN is currently looking increasingly bullish in the short term, with a rising MACD divergence and the stochastic oscillator rising towards the overbought territory. The purpose of bulls is very likely to be that the 61.8% Fibonacci in 21.19, though some immunity has been seen in the 200-SMA line (20.99).

On the downside, bearish pressure looks slightly limited at this stage but we may observe an effort for new sellers to enter the marketplace at more favorable levels. Nevertheless, I really don't believe the current uptrend is at risk unless we see a fall below 20.50, and I expect to see service in the 76.4% Fibonacci (20.18) before any additional downside is achieved.