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USDMXN: Interest Rate Cut Unlikely to Damage Mexican Peso Attraction

USDMXN: Interest Rate Cut Unlikely to Damage Mexican Peso Attraction

2020-02-12 10:30:00
Nick Cawley, Strategist
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USDMXN Price, News and Analysis:

  • A series of rate cuts by the Mexican central bank are expected this year.
  • USDMXN chart retains a bearish bias.

The Mexican central bank is fully expected to cut interest rates by another 0.25% on Thursday, the fifth such cut since mid-August last year. The Mexican economy still faces a raft of economic headwinds, including negligible growth and below-target inflation, and the central bank is seen cutting rates further in 2020. Yet despite these interest rate cuts and a strong US dollar since the start of the year, USDMXN has fallen steadily since late-August and the daily chart remains negative and likely to print lower prices in the short- to medium-term. However, if the Mexican central bank springs a surprise on the market and cuts by 0.50% on Thursday, the short-term outlook would change but the medium-term outlook would remain unchanged.

How to Trade Before a News Release

Mexican Government Bond Yields

Mexican bond yields

Prices via Investing.com

A look at the Mexican government bond yields above shows that a generic 2-year would yield around 6.75%, 530 basis points more than the US Treasury 2-year that currently offers 1.44%. This differential will continue to attract Mexican Peso buyers against the US dollar and keep the spot USDMXN price biased towards the downside. This ‘carry trade’ is even more noticeable in EURMXN where the difference in 2-year yields is 740 basis points. Since late-August 2019, EURMXN has fallen by 9.3%, while USDMXN has fallen by 7.9% over the same time frame, due to the positive yield differential.

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The daily USDMXN chart retains a negative bias with an unbroken series of lower highs and lower lows since mid-August last year. The pair trade below all three moving averages with the 50-dma currently acting a resistance to any attempt at a upside beak. The recent 16-month low print at 18.558, made last Thursday, is likely to come under renewed pressure, which would leave the early-August 2018 swing-low at 18.404 as the next target. The CCI indicator shows the pair entering oversold territory. A break higher would find resistance from both the 20- and 50-day moving averages.

USDMXN Daily Price Chart (February 2019 – February 12, 2020)

USDMXN price

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on USDMXN – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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

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