The Mexican Peso (USD/MXN) is Reversing Once Again
The Technical View
It was on this blog that we posted on the 22nd of January a post called “USDMXN: Multiple signs point to a reversal” and predicted that the USDMXN was finally about to reverse the 3.5 year old wild uptrend that brought it up, all the way to the 22 handle. Consider this blog post another “warning” that the Peso’s move is actually now mature enough to expect at least a correction to the move lower that followed our 1st post.
The USDMXN has spent the past 3 months forming a descending wedge that is currently breaking to the upside. The initial signs were already there and included a momentum slow down and a false break below the 1 year low before reversing higher as well as an apparent RSI divergence on the daily chart. We also want to stress out that a daily close above 18.31 will mark a higher high after a long time. An optimistic objective for this reversal is a retest of the 19.40 level which is in the middle of a support / resistance area that has proved its significance multiple times in the past. The R/R under such a scenario is extremely appealing to ignore and enough for us to consider an attempt to “catch a falling knife” worthwhile.
The Macro Perspective
The week after the election result the USDMXN spike nearly 15%. Trump’s pre-election campaign was filled with “war on Mexico” promises and this led to a natural decline in the Peso. Companies like Ford jumped on the bandwagon and announced production moves from Mexico to the US, much to the President’s approval. However, the Trump administration has so far failed to follow through on its promises and there have been no concrete steps taken. This has led USDMXN to give back practically all of the post-election gains.
It’s worth noting that the Mexican central bank is quick to respond when it needs to defend its currency. Proof of this is Banxico’s frequent FX interventions following the US election, but also its interest rate hikes in 2017. Having said that, the markets are not expecting Banxico to tighten much further from here, so this should be it rate-wise in the short term.
We now stand at an important crossroad for USDMXN. The Peso has recovered but is still vulnerable as the Dollar tries to turn on its recent drop. Attention has shifted away from the US-Mexico relationship but as we well know it only takes one Trump tweet to get sentiment to move from one extreme to the other. Tread carefully when trading the Peso as shifts in sentiment – and potentially in fundamentals – can happen very quickly.
This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.