MEXICAN PESO ANALYSIS:
- USD / MXN Collapsed To Critical Technical Support Following Recent Pullback
- The fundamental context becomes more constructive for the Mexican peso
- U.S. bond market dynamics and global risk sentiment will be the main drivers for EMFX in the near term
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After briefly hitting a six-month high near 20.90 last week, the USD / MXN embarked on a major pullback, wiping out most of its rally since late September, dragged down by a risk appetite rebound.
In the U.S., stagflation fears caused by soaring energy prices and the supply chain snags had weighed on the feeling, but the start of quarterly results the season had helped repress excessive pessimism, because companies profits and the forward outlook remains largely sound, even with a lot economic challenges on the horizon.
Decreased market anxiety paved the way for a solid bounce in US equities, with the S&P 500 and Nasdaq 100 up nearly ~ 6% and ~ 7% respectively from their monthly lows, despite some concerns about the Fed’s policy normalization roadmap.
When things are going of course Wall Street, EMFX tends to do well as traders look for riskier assets with bigger upside potential. That said, if US equities continue to perform well in the short term and the the transition to higher rates on the treasury curve becomes more orderly, the Mexican peso is in a good position gain ground against the US dollar.
In the moo–performance environment we currently live in, athe key advantage MXN enjoys is its high carry, recently boosted by the Banxico tightening cycle. Mexican vsthe central bank raised borrowing costs three times in 2021 and May do ittwice more before the end of the year for start working on rising inflationary pressures. Ultimately, the overnight rate could end the year at 5.25%, widening the spread with the Fed’s benchmark rate.
Another catalyst to consider is the strength of oil, a key export for the Mexican economy. The high prices of this product should bolsterincome for state-owned Pemex, easing budget pressures and reducing the possibility of a sovereign credit downgrade, a perennial threat to the government.
Overall, there is reason to be optimistic about the outlook for the Mexican peso, but traders should continue to monitor bond market dynamics and overall sentiment as these two variables may be more important for the bond market. short-term currencies.
USD / MXN TECHNICAL ANALYSIS
Over the past few days, USD / MXN has fallen towards cluster support in the 20.20 / 20.15 area. If the bears manage to push the price below this floor, the selling momentum could accelerate in sessions to come, paving the way for an evolution towards the 19.85 / 19.80 region.
On the other hand, if the buyers regain control of the market and the price resumes its rise, the first resistance to consider appears at 20.45, a technical barrier defined by the August high. Should USD / MXN clear this obstacle it would not be to be surpriseis lying see a rally to October high at 20.90.
TECHNICAL TABLE USD / MXN
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— Written by Diego Colman, contributor