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USD/MXN: Mexican Peso Plunging into Banxico Rate Decision

USD/MXN: Mexican Peso Plunging into Banxico Rate Decision

2019-11-14 16:27:00
Rich Dvorak, Junior Analyst
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USD/MXN PRICE ACTION SPIKING HEADED INTO BANCO DE MEXICO MONETARY POLICY UPDATE:

  • USD/MXN has surged over 2% from its month-to-date low printed 10 days ago
  • The Mexican Peso could continue to come under pressure amid technical weakness and the prospect of another Banxico rate cut expected to be delivered Thursday at 19:00 GMT
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Spot USD/MXN prices have etched out a broad trading range so far this year roughly between the 18.800-20.200 handles. I noted this past July prior to the 7% spike in the US Dollar relative to the Mexican Peso that USD/MXN rate outlook hinted at higher spot prices. USD/MXN has since retraced lower back toward the bottom end of its year-to-date trading range since topping out on August 29, but a reversal back higher appears to be underway. On that note, Mexico’s central bank – Banco de Mexico (Banxico) – is expected to cut its benchmark interest rate by 25-basis points once again from its current 7.75% target rate.

CHART OF BANXICO INTEREST RATE TARGET & MEXICO INFLATION

Banxico Interest Rate and Mexico Inflation Chart

All of the 26 economists polled by Bloomberg are expecting Banxico to lower its target policy rate by at least 0.25% with several calling for a 50-basis point cut. If Banco de Mexico does in fact cut rates again later today it will be the central bank’s third consecutive interest rate cut. I pointed out prior to the central bank’s last monetary policy update that he Mexican Peso could face renewed selling pressure if Banxico favors anincreasingly dovish approach to conducting monetary policy. This scenario has grown increasingly likely due to plunging readings of Mexico inflation and progressively lower forecasts for Mexico GDP.

CHART OF USD/MXN IMPLIED VOLATILITY & SKEW (OVERNIGHT)

USDMXN Price Chart of Mexican Peso Implied Volatility and Skew ahead of Banxico Rate Decision

As such, USD/MXN implied volatility has soared ahead of the Banxico rate decision in light of elevated uncertainty surrounding a high-impact monetary policy update from a central bank. In fact, USD/MXN overnight implied volatility was just clocked at 13.7%, which ranks in the top 85th percentile of measurements taken over the last 12-months and is above its 20-day average of 8.1%.

A 1-standard deviation trading range can be derived from the Mexican Peso’s overnight implied volatility reading of 13.7%, which, statistically speaking, should encompass price action 68% of the time over the specified time frame. Correspondingly, spot USD/MXN is estimated to fluctuate between 19.306-19.585 and suggests a move of +/- 139 pips.

The overnight USD/MXN risk reversal reading of 0.79, which is up from 0.37 last Friday, speaks to the growing bearish bias amongst forex options traders toward the Mexican Peso headed into the Banco de Mexico rate review. A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection).

USD/MXN PRICE CHART: DAILY TIME FRAME (JUNE 26, 2019 TO NOVEMBER 14, 2019)

USDMXN Price Chart Technical Analysis Mexican Peso Forecast

Turning to the technicals, spot USD/MXN price action has surged off of a critical support near the 19.100 level. With the US Dollar skyrocketing against to the Mexican Peso over the last three days, spot USD/MXN has eclipsed its upper Bollinger Band. Statistically speaking, the 2-standard deviation BB should encompass price action 95% of the time. In other words, spot prices above the upper Bollinger Band could be seen as ‘overbought’ whereas spot prices beneath the lower Bollinger Band could be seen as ‘oversold.’

However, that is not always the case. Looking back to the end of July and early August we witnessed a breakout in spot USD/MXN which happened to top its upper Bollinger Band. Yet the currency pair still churned sharply higher after piercing this technical barrier. This was likely facilitated by a Bollinger Band expansion where the width of the dynamic channel increases. That said, it seems as if we are on the forefront of another Bollinger Band expansion.

USD/MXN PRICE CHART: WEEKLY TIME FRAME (AUGUST 30, 2015 TO NOVEMBER 14, 2019)

USDMXN Technical Analysis Chart of Mexican Peso Price Outlook

Further speaking to the technical strength exhibited by spot USD/MXN prices is the lack of an obstacle that the 50-day and 200-day simple moving averages presented. This speaks to the influx of bullish conviction, which is also portrayed by the sharp rise in the RSI and bullish divergence suggested by the MACD indicator.

Zooming out a bit to a weekly USD/MXN chart brings to focus the most liquid EM FX pair’s overarching pennant pattern. Most prominent is the latest surge in spot USD/MXN prices off the bullish support extended through the series of higher lows recorded since late-2015. The 200-week SMA and 38.2% Fibonacci retracement level of the currency pair’s trading range since 2017 also underpin this area of confluent support which seems to have served as a springboard for USD/MXN.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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