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USD/MXN Outlook: Mexican President Sees Opportunity in Worsening US-China Relationship

USD/MXN Outlook: Mexican President Sees Opportunity in Worsening US-China Relationship

2020-05-31 04:00:00
Daniela Sabin Hathorn, Analyst
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Main USD/MXN Talking Points:

  • The increase in political tensions between the US and China keeps investors weary
  • Mexico hopes that USMCA will spur more investment in North America
  • USD/MXN downtrend stalls at key support but further losses are expected

The Mexican Peso leads emerging market currencies higher on the back of dollar declines in a week where increasing political tensions have dominated market sentiment.

But the easing of lockdown restrictions has brought back the appetite for emerging markets, overshadowing any weariness investors may feel on the back of the China-US conflict over a new security law imposed in Hong Kong. On top of that, the Mexican currency still enjoys higher than average interest rates which could keep its rally going in the next few weeks.

Higher than average volatility usually erodes carry gains, which is why we saw the Peso come under pressure against the Dollar in March and April, but volatility is slowly winding down, which is helping the Peso’s case. Also adding to the EM currency’s demand is a higher appetite for risk and the increase liquidity due to the Federal Reserve’s monetary policy, which could see its demand soften once the Fed scales back on purchases.

But one thing that Mexican president Lopez Obrador is counting on is continued political tensions between China and the US. He believes that eroding trade relationships between the two countries will benefit Mexico as one of 3 partners in the ratified NAFTA group, now known as USMCA. This new trade agreement comes into force on the 1st of July and Mexico is hoping to gain a tighter relationship with the US, therefore helping boost its local economy and its currency.

USD/MXN FORECAST AND ANALYSIS

USD/MXN 4-hour chart (16 March – 29 May 2020)

USDMXN Chart

USD/MXN is now trading either side of the 50% Fibonacci retracement from 18.54 – 25.79 at 22.17 as this seems to be an immediate point of support for the US dollar. Momentum indicators suggest continued downside pressure in the coming week so a push below 22.00 could see the pair retest the 61.8% retracement at 21.31, which was an important level of support in mid-March. Anything below that would leave the 200-day simple moving average as the next downside target at 20.71.

On the upside, initial resistance can be found at Wednesday’s highs around 22.50, with any further upward momentum stalled at the 23.00 handle, where the 38.2% retracement level stands and buyer pressure was stalled at the end of last week. Sustained gains above 23.50 will be needed to confirm 22.00 as a new low and a further push towards the culmination of the symmetrical triangle at 23.90.

--- 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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