Muddling Via Weak Information – Setups in MXN/JPY, USD/MXN

Mexican Peso Outlook:

• The Mexican Peso’s rebound over the previous few days was as soon as once more lower brief by weaker financial knowledge: each the 2Q’21 and June Mexican GDP figures missed
• Surging delta variant COVID-19 infections alongside a comparatively low vaccination price for Mexico might proceed to carry again the Peso.
• We will use the IG Shopper Sentiment Index for USD/CAD charges as an in depth proxy for USD/MXN publicity.

Peso in a Pickle

There’s been a shift again into risk-correlated property in current days, pushed partly by hypothesis that the Federal Reserve will slow-walk its taper plans amid surging delta variant infections in the USA. Serving to gas a rebound in commodities, traders have turn out to be extra amiable in the direction of greater yielding and growth-sensitive currencies. However there was a notable laggard: the Mexican Peso

Regardless of features in the beginning of the week, the Mexican Peso has as soon as extra run right into a wave of current financial knowledge that has underperformed expectations, short-circuiting any semblance of a rally. Constructing on the disappointing June Mexican retail gross sales report and the August Mexican inflation price knowledge, the 2Q’21 and June Mexican GDP figures got here in weaker than anticipated earlier at present.

Nearing essential technical junctures, USD/MXN’s decline and MXN/JPY’s advance could also be stymied in the meanwhile as markets digest these in any other case discouraging basic developments.

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

The bullish breakout skilled by USD/MXN charges regarded at risk earlier this week after the pair got here crashing again right down to the descending trendline from the March and June swing highs. However was as soon as resistance – the 38.2% retracement of the April 2011 low/April 2020 excessive vary at 20.3215 and the 76.4% retracement of the 2020 low/excessive vary at 20.2349 – seems to have changed into an space of help. Moreover, USD/MXN is discovering help at its every day EMA envelope, and with every day MACD nonetheless trending greater, it’s too quickly to counsel that the bullish breakout has run its course.

MXN/JPY Price Technical Evaluation: Each day Chart (March 2020 to August 2021) (Chart 2)

Ever since reaching the 76.4% Fibonacci retracement of the 2020 excessive/low vary at 5.579 in the beginning of July, MXN/JPY charges have decoupled from different threat property and have slowly dripping decrease. The pair finds itself coping with a major check, nonetheless, combating to retake the uptrend from the April 2020 and March 2021 lows – the pandemic uptrend, because it have been.

Momentum stays destructive – MXN/JPY continues to be under its every day 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order – whereas every day MACD declines under its sign line and every day Sluggish Stochastics stay in oversold territory. Failure to retake 5.430 would counsel a deeper setback in the direction of the 61.8% Fibonacci retracement of the 2020 excessive/low vary at 5.330 might be in play by means of the top of August.

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 USA is each nations’ largest buying and selling accomplice, over 80% of Mexico’s exports go to the USA (in comparison with close to 70% for Canada), whereas 30% of Mexico’s GDP is derived from financial actions involving the USA (in comparison with 20% for Canada).

The shut proximity of each nations given their commerce relationship with the USA additionally signifies that their currencies are inclined to commerce in a similar way as nicely. In different phrases, there’s a affordable foundation of expectation for USD/CAD and USD/MXN charges to commerce in a similar way.

At current, the 5-day correlation between the pairs is at present +0.10 (simply defined by CAD outperforming MXN over the previous week) whereas the 20-day correlation is +0.76. One week in the past, on August 18, the 5-day correlation was +0.81 and the 20-day correlation was +0.56.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (August 25, 2021) (CHART 3)

USD/CAD: Retail dealer knowledge reveals 75.39% of merchants are net-long with the ratio of merchants lengthy to brief at 3.06 to 1. The variety of merchants net-long is 34.93% greater than yesterday and 43.92% greater from final week, whereas the variety of merchants net-short is 20.73% decrease than yesterday and 38.94% decrease from final week.

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

Merchants are additional net-long than yesterday and final week, and the mix of present sentiment and up to date modifications provides us a stronger USD/CAD-bearish contrarian buying and selling bias.

— Written by Christopher Vecchio, CFA, Senior Strategist