Mexican Peso Forecast: Coiling, Awaiting Subsequent Draw back Transfer

Mexican Peso Forecast Overview:

• In contrast to different FX pairs, USD/MXN has but to see significant volatility within the first buying and selling days of 2021.
• The Mexican Peso stays on sturdy footing heading into 2021, however like practically all the FX market, the following transfer in USD/MXN might be pushed by the end result of the US Georgia Senate Runoff Elections.
• We will use the IG Shopper Sentiment Indexfor USD/CAD charges as an in depth proxy for USD/MXN publicity, which has a combined bias.

Mexican Peso But to Wake Up within the New 12 months

It’s simply the second buying and selling day of 2021, however the Mexican Peso seems to be on an prolonged vacation. Whilst the remainder of the FX market seems to be waking up, together with its North America counterpart, the Canadian Greenback, the Mexican Peso continues to consolidate in an ever-tightening buying and selling vary versus the US Greenback, which was carved out within the closing two weeks of December. Whereas the worth motion is probably not intriguing, merchants could consider USD/MXN charges as a coiling spring storing potential vitality: a breakout would be the realization of kinetic vitality.

Mexican Peso Foreign exchange Financial Calendar – Remainder of Week

USD/MXN charges could not keep quiet for lengthy, nonetheless. Like practically all the FX market, the following transfer in USD/MXN might be pushed by the end result of the US Georgia Senate Runoff Elections. Like within the speedy wake of the US presidential election, extra management in Washington, D.C. to the Democrats ought to assist foster a weaker atmosphere for USD/MXN. Then again, if Republicans retain management of the Senate, the current coiling worth motion in USD/MXN charges could discover decision increased within the near-term.

In any other case, the upcoming December Mexican inflation (CPI) report shall be launched tomorrow. In line with a Bloomberg Information survey, a slight moderation in worth pressures is anticipated with the headline inflation fee due in at 3.15% from 3.33% in November. Current modifications in Banxico’s management counsel that the central financial institution’s hawkish hue could start to fade; a fee hike cycle is unlikely any time quickly.

USD/MXN Price Technical Evaluation: Each day Chart (January 2020 to January 2021) (Chart 1)

USD/MXN charges have continued by means of their parallel downtrend in current weeks, which works again to the coronavirus pandemic excessive set in April. The newest take a look at of both channel assist or resistance got here in November on the day of the US election, however since that November resistance retest, the pair has been buying and selling within the center to higher a part of the vary. December produced little progress both manner, and the consolidation seen within the closing two weeks of December (arguably going again to mid-November) stays in place.

Bearish momentum has eased, with USD/MXN charges above their each day 5-, 8-, 13-, and 21-EMA, which is barely in bullish sequential order. Each day MACD is trending increased however beneath its sign line, whereas Gradual Stochastics are barely rising above oversold territory. Two vital Fibonacci retracement ranges serving as resistance stay in place: the 76.4% retracement of the 2020 low/excessive vary at 20.2349; and the 38.2% retracement of the previous 10-years of buying and selling low/excessive vary (April 2011 low/April 2020 excessive) at 20.3215.

USD/MXN Price Technical Evaluation: Weekly Chart (January 2015 to January 2021) (Chart 2)

Momentum on the weekly timeframe has eased however stays extra bearish than the each day timeframe. USD/MXN charges are beneath their weekly 4-, 13-, and 26-EMA envelope, which is in bearish sequential order. Weekly MACD is trending decrease beneath its sign line, whereas Gradual Stochastics are nonetheless snug in oversold territory. The longer-term parallel channel biased to the draw back stays the predominant perspective.

Utilizing a Proxy to Monitor USD/MXN Retail Positioning

With respect to the distinction in efficiency between USD/CAD and USD/MXN charges in current weeks, it needs to be famous that the Canadian financial system is extra impartial from the US financial system than is the Mexican financial system. Whereas the US is each international locations’ largest buying and selling accomplice, over 80% of Mexico’s exports go to the US (in comparison with close to 70% for Canada), whereas 30% of Mexico’s GDP is derived from financial actions involving the US (in comparison with 20% for Canada).

The shut proximity of each international locations given their commerce relationship with the US additionally implies that their currencies are inclined to commerce in a similar way as effectively. In different phrases, there’s a cheap foundation of expectation for USD/CAD and USD/MXN charges to commerce in a similar way.

However across the illiquid vacation buying and selling interval, as is usually the case, correlations ‘crumble’ as a scarcity of sustained market exercise produce atypical worth motion. Accordingly, the 20-day correlation between USD/CAD and USD/MXN charges is presently +0.21; one week in the past, the 20-day correlation was +0.24. We’d count on these correlations to power as January marches ahead.

IG CLIENT SENTIMENT INDEX: USD/CADRATE FORECAST (JANUARY 5, 2021) (CHART 3)

USD/CAD: Retail dealer knowledge exhibits 64.71% of merchants are net-long with the ratio of merchants lengthy to brief at 1.83 to 1. The variety of merchants net-long is 0.42% decrease than yesterday and 4.99% increased from final week, whereas the variety of merchants net-short is 20.37% increased than yesterday and a pair of.36% increased from final week.

We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests USD/CAD costs could proceed to fall.

Positioning is much less net-long than yesterday however extra net-long from final week. The mixture of present sentiment and up to date modifications provides us an additional combined USD/CAD buying and selling bias.

— Written by Christopher Vecchio, CFA, Senior Foreign money Strategist