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Weekly Fundamental Mexican Peso Forecast: US Fiscal Stimulus, Silver Prices Key Factors

Weekly Fundamental Mexican Peso Forecast: US Fiscal Stimulus, Silver Prices Key Factors

Christopher Vecchio, CFA, Senior Strategist
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Weekly Fundamental Mexican Peso Forecast: US Fiscal Stimulus, Silver Prices Key Factors

Weekly Technical USD/MXN Rate Forecast: Neutral

  • The prospect of more fiscal stimulus from the US has lifted risk appetite. However, one key factor may be holding back the Peso.
  • Mexico is the world’s top exporter of silver. With silver prices pulling back sharply, the Mexican Peso has seen one of its key fundamental factors lose standing.
  • As a close proxy to USD/MXN rates, we can examine the IG Client Sentiment Indexfor USD/CAD rates to gain intuition on how traders are positioning in the Peso.

Mexican Peso Week in Review

The Mexican Peso gained sharply in the final few days of last week, with USD/MXN rates dropping by -2.45% in the first week of February. This was not an isolated event, with CAD/MXN rates sliding by -2.23%; the breadth of Mexican Peso gains was strong. But that’s not to say it’s been easy trading in recent weeks for the Peso. Mexico is the world’s top exporter of silver. With silver prices pulling back sharply, the Mexican Peso has seen one of its key fundamental factors lose standing. The thrust of risk appetite and next moves in the silver market may help determine the next move in the Mexican Person.

Mexican Peso Economic Calendar Week Ahead

USD/MXN traders will need to pay attention to the base currency for any action this week, as the quote currency sees little by way of events or data. In fact, there is only one item on the Mexican economic calendar worth paying attention to this week. On Tuesday, the January Mexican inflation rate (CPI) is expected to show an uptick from +3.15% to +3.46% (y/y). Higher inflation may help cool some of the dovish talk at the margins around Banxico in recent months, which in turn could help the Peso continue last week’s run of strength. Meanwhile, a bevy of US economic data as well as a speech from Fed Chair Jerome Powell could prove to catalyze further volatility in USD-pairs, USD/MXN rates included.

USD/MXN Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 1)

Weekly Fundamental Mexican Peso Forecast: US Fiscal Stimulus, Silver Prices Key Factors

USD/MXN rates have traded higher through early-2021, but the consolidation seen since mid-November remains more or less in place. Overall, USD/MXN rates remain in their parallel downtrend going back to the coronavirus pandemic high set in April. Just overhead, there are two significant Fibonacci retracement levels serving as resistance: the 76.4% retracement of the 2020 low/high range at 20.2349; and the 38.2% retracement of the past 10-years of trading low/high range (April 2011 low/April 2020 high) at 20.3215. We have yet to see two consecutive daily closes above this Fibonacci cluster.

Momentum is effectively neutral after the recent reversal higher, but is turning more bearish. USD/MXN rates are now below their daily 5-, 8-, 13-, and 21-EMA, which is in neither bearish nor bullish sequential order. Daily MACD is trending lower but remains above its signal line, while daily Slow Stochastics are trending lower out of overbought territory.

Using a Proxy to Track USD/MXN Retail Positioning

With respect to the difference in performance between USD/CAD and USD/MXN rates in recent weeks, it should be noted that the Canadian economy is more independent from the US economy than is the Mexican economy. While the United States is both countries’ largest trading partner, over 80% of Mexico’s exports go to the United States (compared to near 70% for Canada), while 30% of Mexico’s GDP is derived from economic activities involving the United States (compared to 20% for Canada).

That said, the close proximity of both countries given their trade relationship with the United States also means that their currencies tend to trade in a similar fashion as well. To this end, the 20-day correlation between USD/CAD and USD/MXN rates is currently +0.78; one week ago, the 20-day correlation was +0.66.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (February 5, 2020) (CHART 4)

Weekly Fundamental Mexican Peso Forecast: US Fiscal Stimulus, Silver Prices Key Factors

USD/CAD: Retail trader data shows 73.08% of traders are net-long with the ratio of traders long to short at 2.71 to 1. The number of traders net-long is 29.67% higher than yesterday and 16.52% higher from last week, while the number of traders net-short is 9.58% higher than yesterday and 9.74% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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