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Mexican Peso Falls as Turkish Lira Crisis Saps EMFX Sentiment, USD/MXN Eyes Resistance

Mexican Peso Falls as Turkish Lira Crisis Saps EMFX Sentiment, USD/MXN Eyes Resistance

Diego Colman, Contributing Strategist


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  • Mexican Peso weakens as EMFX retreats amid a large sell-off in the Turkish Lira
  • USD/TRY briefly jumps to an all-time high after TCMB cuts rates for the third time in a row to stimulate the economy despite rampant inflation
  • The Turkish Lira crisis may weigh on EMFX through the sentiment channel, but it is unlikely to be a major source of weakness

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The Mexican peso has suffered heavy losses since last week, as sentiment towards riskier currencies has soured amid broad-based dollar (USD) strength, triggered by expectations that the Federal Reserve may withdraw accommodation faster than expected to combat elevated price pressures. During this time, USD/MXN has risen from a low of 20.25 to a high of 20.89 this Thursday, before settling around 20.78.

U.S. monetary policy repricing, which lifted Treasury yields across the curve, has certainly been a headwind for EMFX, but it hasn’t been the only negative variable. In some cases, idiosyncratic factors have exacerbated underperformance.

For example, the Turkish lira (TRY) has plunged about 15% against the greenback since the beginning of the month, but the sharp depreciation is a self-inflicted wound by the government rather than an external shock. In recent months, President Tayyip Erdogan has exerted extreme pressure on the country’s central bank (TCMB) to inject stimulus to spur economic growth, despite rampant inflation, currently approaching 20% y/y. Cornered, the TCMB has reduced borrowing costs at its last three meetings, with today's cut bringing the key rate to 15% from 16% previously. Following this policy move, USD/TRY briefly shot up to 11.35 this morning, an all-time high.

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The easing bias adopted by TCMB may aggravate Turkey’s currency crisis in the near term, sparking volatility and dragging EMFX through the sentiment channel at an already difficult time for the group that must cope with rising yields in the United States. Contagion, however, is not likely to be extreme as the TRY’s decline is driven by very specific circumstances that are not present elsewhere.

As for the Mexican peso, the outlook for the Latin America currency is becoming less benign. Although its carry attractiveness reinforced by Banxico's tightening cycle may serve as a cushion to limit outflows, US monetary policy dynamics and the fragile market mood may limit any major appreciation attempt. For this reason, USD/MXN may be slightly biased to the upside in the near term. That said, traders should exercise caution, especially next week, when liquidity will bethin due to the Thanksgiving holiday in the U.S. At times, lower liquidity environments can give way to erratic fluctuations and amplify movements in financial assets.

From a technical standpoint, USD/MXN has been moving within the confines of an ascending channel since early June, setting higher lows and higher highs sequentially, a sign that the trend points upwards.After the recent rally, price is approaching the channel’s upper boundary and the November high near 20.95/21.00, an area that can be considered resistance. If the bulls manage to clear this barrier, traders should prepare for a possible rally towards the 2021 high at 21.64.

Alternatively, if buying impetus fades and USD/MXN pivots lower, sellers could push the pair towards support at 20.50, but if this floor fails hold, the 200-day average near 20.20 would become the next immediate downside focus.

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USD/MXN Chart prepared in TradingView


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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.