USD/MXN Forecast: Neutral
To my surprise, the Mexican Peso has been standing its ground in the last few days and has outperformed some of the major currencies like the US Dollar and the Euro despite the continued rise of yields. The worst day for USD/MXN this week was on Wednesday after the Federal Reserve sent out a “keep calm and watch the economy recover” message, which sent the US Dollar to a two-week low, favoring risk-on currencies like the Mexican Peso.
MXN Performance Against a Basket of Currencies (USD, GBP, EUR, JPY)
But the fact that the Fed gave more importance to getting full employment than controlling inflation led investors back into the mindset that once the economic recovery takes place this year, it is likely the central bank will have to bring forward its adjustment to monetary policy, sending US bonds yields higher to end the week. But Mexican Peso buyers are holding their ground and USD/MXN is set to end the week around 2.6% lower than where it started, following the bearish pressure seen since the 4-month high printed on March 7th at 21.63.
This may have to do with the fact that Banxico – Mexico’s central bank – is unlikely to continue its rate easing cycle when it meets again on this Thursday (25th March) given how inflationary pressures have been picking up in the country, propping up the Mexican Peso and its value as a carry trade currency, with its current rate at 4% much higher than the average 0% – 0.25% range in most developed economies.
USD/MXN Daily Chart
The question now is whether USD/MXN will pay close attention to rising bond yields or if the Peso is still able to garner some strength and bring the pair down further. The daily chart is showing how the pair might be setting up to undergo a head and shoulders pattern, with the shoulders at 21.62 and the neckline around current support at 20.28, although it is very early stages and we’ll need to see a significant push higher to start to consider this pattern.
Although that would be bearish for the pair in the long-term, it would pose a significant threat to Peso bulls in the short-term, so resistance may arise at the confluence between the 20- and 200- SMAs at 20.83. But if bears are able to regain control, the head and shoulders pattern wouldn’t come into play and I would pay close attention to the 76.4% Fibonacci at 20.18, an important area of support in the last few months and of increased significance in the current chart given its confluence with the 100-day SMA. If this area doesn’t hold, then 19.87 is likely to be the next key support.
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin