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Mexican Peso Outlook: USD/MXN Falls as Risk-Appetite Recovers. Will This Trend Last?

Mexican Peso Outlook: USD/MXN Falls as Risk-Appetite Recovers. Will This Trend Last?

Diego Colman, Contributing Strategist
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  • The Mexican peso has gained ground against the U.S. dollar in recent weeks, supported by a strong recovery in risk appetite
  • Traders should be cautious in the coming sessions, as thin liquidity can trigger wild and erratic market moves without warning
  • Starting next week, omicron, economic data, and monetary policy should once again be the focus of forex traders' attention

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After exploding higher in late November, USD/MXN has reversed course and started trending lower in recent weeks, weighed down by bullish sentiment and weaker demand for safe-haven positions. During this time, risk assets have soared, with the S&P 500 rising more than 6% to record highs from its December low. While not foolproof, when equities rise across the board, the EMFX tends to perform well against the US dollar as traders become less fearful about the future and seek higher-yielding bets.

For the next few days, we do not have any major economic releases in either the US or Mexico, so global investor sentiment should continue to be the main catalyst for currency markets. That said, should the Santa Claus rally progress further on Wall Street, the Mexican peso could outshine the US dollar and end 2021 on a high note. The reverse is also true: should sentiment sour and stocks begin to sell off aggressively, USD/MXN could pivot north and shoot higher in the blink of an eye. Starting next week, when traders return to their desks from the holidays, COVID-19 (omicron), economic data and monetary policy (Fed and Banxico) should be back in focus.

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For traders deciding to take positions this week, it is important to bear in mind one crucial fact: trading volume will be very low heading into the end of the year. Low liquidity can sometimes spark excessive volatility, amplifying downward or upward moves. If caught on the wrong side of the trade, these erratic and exaggerated market swings can lead to large losses.

Turning our attention to technical analysis, USD/MXN has tested trendline and Fibonacci support near 20.55 today, but has been unable to breach the area decisively. For bearish pressure to pick up steam, we need to see a move below this floor in the coming sessions. If sellers manage to accomplish this feat, USD/MXN could retreat towards 20.25, the November low, before attacking the 20.10 region.

On the flip side, if buyers retake control of the market, the first resistance to consider appears near 20.97. If the pair climbs above this barrier, the price could be on its way to retest the December 15swing high at 21.36.


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.