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USD/MXN Outlook: Mexico GDP Beats Forecasts But Risk Remains to the Downside

USD/MXN Outlook: Mexico GDP Beats Forecasts But Risk Remains to the Downside

Daniela Sabin Hathorn, Analyst

Main USD/MXN Talking Points:

  • After a week of continued USD weakness, risk-off sentiment has regained control
  • The Mexican economy contracted 1.6% in Q1, its worst reading since 2009
  • USD/MXN finds key support and bounces back above 24.50

After a rebound in the Mexican Peso and widespread weakness of the US Dollar saw USD/MXN head towards lows of the month, the pair encountered a critical support that halted the downtrend, causing it to appreciate 3.8% in the 24 hours to Friday midday, jumping back above 24.50 pesos per dollar.

Trump’s accusation that China is the one responsible for spreading the coronavirus (COVID-19) has seen the US president threaten to impose tariffs on the Asian country to make them pay for the economic damage the virus has caused to the United States. But this has not boded well with investors, sending equity markets into a frenzy of selling pressure and halting the advances of currencies most linked to risk, especially those of emerging market.

On top of the fear of renewed trade tensions, preliminary data shows the Mexican economy is on track to face the worst quarterly contraction since 2009, as GDP is expected to have shrunk 1.6% in the first quarter of the year. Although this is slightly better than the -1.7% predicted by analysts, worries remain about the contraction in the second quarter, given that the majority of the lockdown weakness will be seen between April and June.

Worries are especially high in regards to Mexico’s president Lopez Obrador’s unwillingness to aid local businesses due to his leftist view and uneasy relationship with corporate leaders. He believes the country should not increase its public debt even if that would help keep companies afloat, a gamble that could leave the country in a relatively good position if it pays off but risks high levels of unemployment.

But a debt that seems inevitable is the 23.6 billion dollar loss than state-owned oil company Pemex has posted in the first quarter of 2020. The plummet in oil prices due to a lack of crude demand has ramped up the costs of it’s already struggling refinery business, causing Moody’s to cut Pemex debt to junk status earlier this month, saying that the government’s insufficiency to effectively address the economic challenges has left the country’s economy in bad shape.

USD/MXN FORECAST AND ANALYSIS

USD/MXN 4-hour chart (12 February – 1 May 2020)

USDMXN chart

USD/MXN fell through the 23.6% Fibonacci retracement from all-time highs, but the pair found resistance at the critical support level of 23.6594, which has been key since mid-March. But the V-shaped recovery has left the pair struggling to consolidate a clear direction as risk-on/off sentiment switches constantly. If we look at the 4-hour chart, we can see how simple moving averages suggest that the bounce off the critical support have caused a short-term uptrend pattern, supported by a strengthening MACD histogram.

The bull objective is to stay above the 25.00 handle, where immediate resistance can be found, followed by the highs of the 23rd of March at 25.46. Selling pressure is likely to increase if the pair is able to reach the all-time high of 25.79, possibly causing a short-term correction in the uptrend. If, however, bears are able to regain control, a retest of the support at 23.659 is likely, with further selling pressure taking the pair towards the 23.00 handle, where the 38.2% Fibonacci sits.

--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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

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