Rising US Yields Assist USD/MXN Fend Off Breakdown, For Now

Mexican Peso Forecast Overview:

• USD/MXN charges began the yr by breaking the 2020 low, solely to see a pointy reversal greater alongside rising US Treasury yields.
• Total, USD/MXN charges stay of their parallel downtrend going again to the coronavirus pandemic excessive set in April. Simply overhead, there are two important Fibonacci retracement ranges serving as resistance.
• We will use the IG Shopper Sentiment Indexfor USD/CAD charges as an in depth proxy for USD/MXN publicity, which has a bearish bias.

Mexican Peso Holding its Personal

Per week into 2021, and it’s confirmed to be a troublesome go of types for rising market currencies. Whereas extra US fiscal stimulus is sweet information for danger urge for food broadly, EM FX has been double tapped by rising lockdowns and rising US Treasury yields. A brief-term atmosphere of weaker client demand from Western developed economies is taking form, dinging the expansion foreign money area – which EM FX occupies.

However the Mexican Peso, regardless of discovering itself on weaker footing via the beginning of the yr, is faring fairly nicely. All issues thought-about, the US Treasury 10-year yield has risen to its highest degree since March 19, however USD/MXN charges are nonetheless holding under their December 2020 closing highs. Contextually, the worth motion means that the latest reversal greater could merely be a breather prior to a different push decrease.

Mexican Peso Financial Calendar – Remainder of Week

USD/MXN merchants might want to take note of the bottom foreign money for any motion this week, because the quote foreign money sees little by means of occasions or information. Actually, the Mexican financial calendar is totally barren for the rest of the week. In the meantime, with the December US inflation report (CPI), December US retail gross sales, and quite a few Federal Reserve policymakers talking over the course of the week, it’s nonetheless doable that USD/MXN charges expertise heightened value motion, significantly if US Treasury yields proceed to show risky themselves.

USD/MXN Fee Technical Evaluation: Day by day Chart (January 2020 to January 2021) (Chart 1)

USD/MXN charges have turned greater in the beginning of 2021, however the consolidation seen since mid-November stays roughly in place (discounting intraday strikes). Total, USD/MXN charges stay of their parallel downtrend going again to the coronavirus pandemic excessive set in April. Simply overhead, there are two important Fibonacci retracement ranges serving as resistance: 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.

Momentum is successfully impartial after the latest reversal greater. USD/MXN charges are actually under their day by day 5-, 8-, 13-, and 21-EMA, which is in neither bearish nor bullish sequential order. Day by day MACD is trending greater however under its sign line, whereas Sluggish Stochastics are beginning to straddle their median line. Extra endurance is required within the short- and long-term.

USD/MXN Fee Technical Evaluation: Weekly Chart (March 2011 to January 2021) (Chart 2)

Momentum on the weekly timeframe has eased however stays extra bearish than the day by day timeframe. USD/MXN charges are under their weekly 4-, 13-, and 26-EMA envelope, which is in bearish sequential order. Weekly MACD is beginning to flip whereas in bearish territory, nonetheless, and weekly Sluggish Stochastics have been rising whereas in oversold territory. The longer-term parallel channel biased to the draw back stays the predominant perspective, as a interval of ‘digestion’ – the place the market works off excessive readings in indicators – creates a churn in value motion, producing a sideways vary for a interval of weeks or months.

Utilizing a Proxy to Observe USD/MXN Retail Positioning

With respect to the distinction in efficiency between USD/CAD and USD/MXN charges in latest weeks, it must 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 international locations’ largest buying and selling associate, 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 international locations given their commerce relationship with the USA additionally implies that their currencies are likely to commerce similarly as nicely. In different phrases, there’s a cheap foundation of expectation for USD/CAD and USD/MXN charges to commerce similarly.

However across the illiquid vacation buying and selling interval, as is often the case, correlations ‘disintegrate’ as a scarcity of sustained market exercise produce atypical value motion. Accordingly, the 20-day correlation between USD/CAD and USD/MXN charges is at the moment +0.47; one week in the past, the 20-day correlation was +0.21. We might count on these correlations to energy as January marches ahead.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (JANUARY 12, 2021) (CHART 3)

USD/CAD: Retail dealer information reveals 69.78% of merchants are net-long with the ratio of merchants lengthy to quick at 2.31 to 1. The variety of merchants net-long is 19.22% greater than yesterday and seven.55% greater from final week, whereas the variety of merchants net-short is 8.01% decrease than yesterday and 14.62% 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 could proceed to fall.

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

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