USD Claws Back Losses as a Reality Check Kicks In

USD/MXN Fundamental Forecast: Neutral

USD/MXN starts to recover downside momentum heading into the new week as an unexpected unchanged rate decision from Banxico consolidates the Peso as an attractive investment currency. This comes after another week of choppy trading as news headlines dominated market sentiment, and despite not being able to perform as well as the previous week, the Mexican Peso attempts to recover buyer support as the US Dollar steadies on a much-needed reality check on the current situation.

Looking at the daily chart, the previously mentioned support at the 76.4% Fibonacci level was unable to hold strong given the increase on volatility in Monday, but the 20.26 mark has proven to be a key area for buyers as USD/MXN slipped above this level, becoming again a key area for support in the short-term, followed by last week’s low at the 20.00 handle, a key psychological level. On the upside, another attempt to push higher is likely going to be limited to the key support-turned-resistance area between 20.83 and 21.04.

USD/MXN Daily chart (31 January – 13 November 2020)

I do believe it still is the case that we are faced with a weaker Dollar rather than a stronger Peso, although Banxico’s latest monetary policy meeting has changed that to some extent. As news broke on Monday about the effectiveness of the Pfizer coronavirus drug, equity markets rallied significantly, pointing to a significant improvement in risk appetite, which of course helped the Mexican Peso. But the US Dollar has been on a continuous downfall since its peak in March, and that was obvious in the currency market as positivism spread through other assets.

The Dollar is oversold, and has been for some time, so further downside based on news headlines is slightly limited, giving way mostly to reactions in change of policy. This means that despite a significant improvement in market sentiment, USD pairs are likely to be subdued given the Dollar’s continued depreciation, which is likely to keep the downside in USD/MXN limited as we move forward.

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Regarding Banxico’s meeting on Thursday night, four of the five members of the governing board voted to leave rates on hold at 4.25% after almost a year and a half of continuous rate cuts. The decision was based mostly on the higher than expected inflation rate in the month of October, which saw the figure push above the upper tolerance threshold, coming in at 4.09%, its highest level since June 2019, and beating analyst expectations.

Although the rate hold was unexpected, this does not mean that Banxico has drawn a line under the easing cycle, as Mexico continues to be hard hit by the coronavirus pandemic, with job losses predicted at an all time high. The “pause”, as the central bankers called it, is in place to allow for more economic data to show the progress of the economy, mostly seeing how inflation has managed to recover quicker than expected, pointing to more optimistic forecasts.

Looking ahead, not much is happening in regards to data next week, with main focus expected to be on any further vaccine news. But the week following has a lot of key figures coming out, which might not look very important in isolation given how markets are more focused on the global macro setting, but they are key for Banxico deciding it’s next monetary policy move. From retail sales to Q3 GDP, Peso traders should be paying close attention to these figures as the coronavirus risk is far from over.