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USD/MXN Price Analysis: US Dollar Spikes to 11-Week High vs Peso

USD/MXN Price Analysis: US Dollar Spikes to 11-Week High vs Peso

2020-02-24 18:20:00
Rich Dvorak, Analyst
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USD/MXN PRICE ANALYSIS: US DOLLAR TO MEXICAN PESO FORECAST & TECHNICAL TRADE LEVELS

  • USD/MXN just notched its highest reading since December 11 following a 3.5% surge in the US Dollar relative to the Mexican Peso over the last four trading sessions
  • Spot USD/MXN price action is probing its technical resistance posed by its 200-day simple moving average after eclipsing downtrend resistance
  • Mexican Peso outlook remains upbeat but is mired by US Dollar strength as coronavirus outbreak concerns mount

The Mexican Peso is plunging against the US Dollar. Spot USD/MXN price action is extending its rebound off a key technical support level dating back to mid-2018.

While the spike higher in the US Dollar may be technically charged, the jump in USD/MXN is also likely attributed to the latest influx of currency volatility and risk-aversion, which comes amid mounting fears around the novel coronavirus outbreak in Wuhan, China.

Potential for a reversal in USD/MXN was pointed out recently in a note that the Mexican Peso was pressing resistance, but after spot prices climbed 3.5% over the last few trading days, where might this top emerging markets currency pair head next?

US DOLLAR DRIVEN BY INFLUX OF CURRENCY VOLATILITY & RISK AVERSION

An abrupt return of volatility – driven by rekindled recession odds – has largely encouraged traders to flee risk assets and move into safe-haven currencies such as the US Dollar.

The US Dollar is believed to reign over the broader FX market as the ultimate haven and is in high demand during periods of elevated volatility. This is widely due to vastly superior liquidity of USD relative to other major currency pairs.

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I highlighted in a US Dollar volatility report that risk-aversion permeating across the forex market, most recently attributable angst that surrounds the novel coronavirus outbreak and its impact on the global economy, looked to serve as a positive tailwind for the US Dollar.

USD/MXN price action has potential to continue its retracement higher, in turn, so long as volatility lingers and traders remain in risk-aversion mode.

MEXICAN PESO SUPPORTED BY CORONAVIRUS DISRUPTION TO GLOBAL SUPPLY CHAIN

Outlook for USD/MXN is also underpinned a positive fundamental backdrop for the Mexican Peso. According to Arturo Herrera, Mexico’s Finance Minister, a return of growth to Mexico in 2020 is expected, which follows a contraction in GDP last year.

However, it was also pointed out that the Mexican Peso rally enjoyed earlier this year – owed largely to the coronavirus-induced global supply chain shock underpinning bullish MXN price action – was at risk of reversing amid widespread US Dollar dominance that pushed the DXY Index to a three-year high.

USD/MXN PRICE CHART: WEEKLY TIME FRAME (OCTOBER 2016 TO FEBRUARY 2020)

USDMXN Price Chart US Dollar to Mexican Peso Forecast

Looking at a weekly USD/MXN chart brings to focus the technical support bounce off the 18.500 mark. This level of confluent support is underpinned by the 23.6% Fibonacci retracement of the January 2017 to July 2017 slide in the Mexican Peso vs the US Dollar.

Spot USD/MXN price action now faces an intimidating level of technical resistance around the 19.000-19.200 zone, which roughly aligns with the 38.2% Fib of the aforementioned trading range.

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Nevertheless, spot USD/MXN currently trades comfortably above its 9-week and 34-week exponential moving averages, which may provide a bit of buoyancy to the US Dollar’s ongoing rebound.

USD/MXN PRICE CHART: DAILY TIME FRAME (AUGUST 2019 TO FEBRUARY 2020)

USDMXN Price Chart US Dollar to Mexican Peso Forecast

USD/MXN could perhaps extend its ricochet higher off the 18.600 price seeing that the US Dollar has breached the downward-sloping resistance trendline extended through the swing highs printed August and November last year.

Notable technical obstacles faced by USD/MXN around the 19.200 level include the 200-day simple moving average and 61.8% Fibonacci retracement of the December 2019 to February 2020 bearish leg could thwart a prolonged rebound in spot prices.

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That said, recent strength exhibited by the US Dollar, which comes in light of rising currency volatility and diminishing attractiveness of the currency carry trade, may ultimately strongarm spot USD/MXN price action higher with coronavirus concerns running rampant.

Overcoming technical resistance posed by the 19.200 handle might open up the door to further upside potential. The 76.4% Fib of the latest bearish leg, as well as early December 2019 highs, could serve as other possible topside objectives for USD/MXN bulls.

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

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

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

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