MEXICAN PESO FORECAST: USD/MXN PRICE ACTION COULD BE PRIMED FOR A REVERSAL WITH BANXICO INTEREST RATE DECISION DUE
- Mexico’s central bank, Banxico, is slated to announce its latest interest rate decision this week and expected to cut for the fifth consecutive meeting
- The Mexican Peso has recently climbed to 16-plus month highs against the US Dollar on the back of USMCA trade deal optimism and coronavirus fallout
- USD/MXN, EUR/MXN and GBP/MXN could be at risk of reversing higher if Banxico shocks forex traders by cutting its benchmark interest rate by more than the expected 25-bps
Although emerging market currencies such as the Mexican Peso often face downward pressure during episodes of volatility and risk aversion, MXN price action has remained resilient as of late. Due to lingering angst over potential impact from the novel coronavirus outbreak, market sentiment and appetite for risk has deteriorated, but this has presented an opportunity for Mexico and the Peso.
Similar to when businesses reevaluated and shifted supply chains in response to tariff and trade war uncertainty, it looks like this is occurring once again with China and its citizens on lockdown to curb the coronavirus pandemic. The abrupt halt in manufacturing across China has correspondingly steered business executives to reallocate production and investment resources elsewhere – like Mexico.
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Correspondingly, this prospect of growing business investment in Mexico is likely boosting MXN prices and exacerbating USMCA deal cheer. Spot USD/MXN now trades 4.5% off its early December swing high near the 19.600 price level and places the Mexican Peso at 16-month highs relative to the US Dollar.
USD/MXN PRICE CHART: WEEKLY TIME FRAME (NOVEMBER 2016 TO FEBRUARY 2020)
USD/MXN price action could be attempting to bottom, however, with a critical level of technical support around the 18.600 area showing potential of hindering additional gains in the Mexican Peso. Spot USD/MXN appears to have rebounded off its 200-week EMA and 23.6% Fibonacci retracement of its trading range since the January 2017 peak. Also, USD/MXN bouncing off the bottom channel of the Bollinger Band ™ could, statistically speaking, help facilitate a broader mean-reversion back higher.
Meanwhile, the central bank of Mexico, Banxico, is on tap to deliver a monetary policy update this Thursday, February 13 at 19:00 GMT. Banxico is expected to cut its policy interest rate by 25-basis points from the current 7.25% target, but there remains a risk that Mexico central bankers will deliver a more aggressive rate cut considering the recent history of split board member decisions with some personnel opting for a bolder move.The nosedive in crude oil prices amid ongoing coronavirus concern is another noteworthy downside risk faced by the Mexican Peso.
USD/MXN PRICE CHART: DAILY TIME FRAME (JULY 2019 TO FEBRUARY 2020)
Zooming in on a daily USD/MXN chart we can observe positive divergence on the relative strength index (RSI), which also hints at a potential reversal attempt. If spot USD/MXN can eclipse its 8-day and 34-day exponential moving averages (EMA), Mexican Peso bears may make a push for the 19.000 handle. Eclipsing this technical barrier could open up the door for spot USD/MXN price action to target technical confluence around the 19.200 price level, which is highlighted approximately the 38.2% Fib of the currency pair’s latest bearish leg and also the 200-EMA.
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