Hassan Maishera
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Mexican Peso

The Mexican Peso took a breather today, with the USD/MXN pair dropping below 20.000 for the first time in days. The drop in oil prices and defensive market tone saw the US Dollar record losses against its North American currency counterpart for the first time in days.

USD/MXN Could Slip Lower

The Peso was able to get one over the US Dollar for the first time in days. Mexico’s central bank, Banxico, started increasing borrowing costs last month as it loos to contain the rising inflationary pressures. The decision to raise rates and the hawkish shift by the apex bank took Wall Street by surprise, leading several investors to price the start of a tightening cycle. The apex bank is expected to adopt three more rate hikes before the end of the year.

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The monetary policy divergence between the US apex bank and Banxico has worked in the Peso’s favor today. However, the volatility might need to remain low for the search-for-yield trade to be at its optimum now that the summer is approaching.

The USD/MXN pair could experience further weakness over the coming hours as investors turn their attention to the June inflation data that would be released tomorrow. The analysts are expecting the heading CPI to ease slightly to 5.87% y/y from 5.89% y/y in May. However, if the CPI doesn’t cool or accelerate further, traders could expect a rate hike in September, and that could fuel further weakness for the USD/MXN pair.

USD/MXN chart. Source: FXEMPIRE

Large Oil Correction Could Put USD Back On Top

The investor sentiment is fragile at the moment. Combine it with a large correction in oil price, and the Mexican Peso or crude-linked currencies would struggle to perform excellently against the US Dollar.

However, if the situation should resolve itself over the next few years, then the MXN could continue to benefit, and the USD/MXN could slip below 19.000. Currently, USD/MXN has stalled around its 200-day simple moving average, close to the 20.00/ 20.20 mark. If the sellers are able to push the price lower in the next trading sessions, then USD/MXN could head towards the 19.80 region. Failure to defend this support level could bring into focus the 2021 low near 19.55, followed by the 19.00 psychological level.

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