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USD/MXN eyes 12.6988 in near future

USD/MXN eyes 12.6988 in near future

Usman Ahmed,

Talking Points

  • Lower High and Lower Low suggests bearish trend in USD/MXN
  • The pair is eyeing 12.6988 (50% fib level)
  • MXN has some real strength due to structural reforms in energy sector and steady recovery in the US, Mexico’s top trading partner

USD/MXN once again failed to give a daily closing above 76.4% fib level, indicating signs of weakness, amid dovish remarks made by Fed outgoing chairman Ben Bernanke. The pair closed at 13.0996 on Friday, well below 13.1577, a key fib level as shown below;

usdmxn_body_Picture_3.png, USD/MXN eyes 12.6988 in near future

The pair is being traded in a triangle since September 2013 but it seems that a breakout might be in play very soon because the triangle has become too squeezed;

usdmxn_body_Picture_2.png, USD/MXN eyes 12.6988 in near future

In my opinion, a breakout through lower trendline channel is very likely because the pair is in bearish trend; as the last wave shows Lower High (LH) and Lower Low (LL) on daily chart, thus as per wave analysis (not EW) the current wave should end below 12.8014, breaking the channel support.

If the price follows exactly the same pattern as discussed above, in that case we will have a scenario like this:

usdmxn_body_Picture_1.png, USD/MXN eyes 12.6988 in near future

Yes, a breakout through lower trendline will be eyeing 12.6988 (50% fib level of April-June 2013 rally) ahead of 12.52077 (61.8% fib level) and then 12.29586 (76.4% fib level). On upside, the pair has to break 13.1575 ahead of channel resistance and then 13.2729 in order to turn our bias into bullish.

Before a bearish breakout the pair will also be confronting 200 DMA which is just touching the lower trendline channel at the time of writing.

Fundamental Scenario

In his last major address as Fed chairman, Ben Bernanke on Friday said that December tapering decision does not mean that Fed would continue reducing stimulus in forthcoming meetings. He re-iterated that the benchmark interest rate would remain near zero (at current 0.25 level) for a longer period of time even if jobless rate falls below 6.5%, a statement which is in contrast to Fed’s previous stance. Analysts however believe that such dovish remarks may be an attempt to ease fears and uncertainty in the US stock investors.

On the other hand after two successive cuts in interest rate, Mexico’s central bank kept the rate unchanged in December monetary policy meeting amid inflation optimism. It is pertinent that MXN outperformed other Latin American currencies in 2013 thanks to steady recovery in its largest trading partner the US and structural reforms at home. The USD/MXN recorded only a 1.6 per cent slump in 2013 as compared to 10% fall in other Latin American currency pairs.

MXN is very likely to continue outperforming regional currencies in 2014 amid key energy reforms by the government as legislators have approved privatization of Mexico’s state-run energy sector.

USD/MXN is expected to slide down up to 12.4 in the first quarter of 2014, according to a recent forecast released by Morgan Stanley. Similarly, J. P. Morgan also sees USD/MXN falling up to 11.95 in the first quarter of 2014.

So based on Technical Analysis, Monetary Policy stance of the US and Mexico’s central banks, economic outlook and institutional forecasts, we may conclude that a significant fall in USD/MXN is very likely during the first quarter and the whole 2014.

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