• Emerging market currencies gain ground amid risk appetite. 
• USD/MXN points further to the downside, particularly under 20.65. 
• Data shows no surprises in the US and Mexico's highest inflation in decades. 

The USD/MXN is trading around 20.65, at the lowest level in a month. A weaker greenback across the board and the risk-on tone across financial markets are supporting the Mexican peso. 

The pair is testing levels under 20.70 and is on its way to the lowest close since November 27. A consolidation below 20.65 would point to more losses with the next strong support at 20.45/50. A recovery above 20.70 should alleviate the bearish tone, while on above 20.90, the US dollar could strengthen. 

Data from Mexico and US 

In the US, many economic reports were released. Personal spending rose 0.6% in November, in line with market consensus while the core PCE advanced to an annual rate of 4.7% above the 4.5% expected. The Labor Department reported Initial Jobless Claims came in at 205K, unchanged from the week before. The November Durable Goods Orders' preliminary reading showed a larger-than-expected gain of 2.5%. The University of Michigan’s December reading of Consumer Sentiment (final) came in at 70.6. New Home Sales soared 12.4% in November, recovering from a 8.4% decline in October.

The key number in Mexico was positive as the mid-December Consumer Price Index showed a lower-than-expected reading at 7.45% (annual), below the 7.70% of market consensus but still the highest in twenty years. The higher inflation pushed the Bank of Mexico to hike rates by 50bps last week. 

“Next policy meeting is February 10 and another 50 bp hike to 6.0% seems likely if price pressures remain high. Swaps market sees the policy rate peaking at 7.50% by the end-2022 before falling slightly in 2023.  This may understate Banxico’s need to tighten”, mentioned analysts at Brown Brother Harriman. 

Technical levels