Mexican Peso Outlook:
- Stability in long-end international bond yields has given room for threat urge for food to return to markets, together with within the rising markets forex house.
- MXN/JPY has traded to its yearly excessive and are actually difficult a multi-year downtrend, whereas USD/MXN has dropped by way of its intrayearly uptrend, and a possible head and shoulders sample could also be guiding worth motion decrease.
- We will use the IG Client Sentiment Indexfor USD/CAD charges as a detailed proxy for USD/MXN publicity, which has a blended bias.
Mexican Peso Continues to Acquire Power
How quicky the Mexican Peso’s fortunes have modified in latest weeks. Once we final checked in at first of March, the Peso was within the midst of a gradual streak of abrasion, having been battered by rising global bond yields, significantly these of its northern neighbor, the US.
However we seen the developments as short-term in nature, noting that “extra US fiscal stimulus is nice information for threat urge for food broadly, and a greater than anticipated US labor market report for February has shifted the narrative from ‘inflation’ to ‘reflation,’ which tends to be useful for growth-linked belongings. USD/MXN charges could also be ripe for a reversal, whereas MXN/JPY charges may discover their footing and shake off what’s been trendless buying and selling to this point in 2021.”
Since we final checked in on the Peso, stability in long-end international bond yields has given room for threat urge for food to return to markets, together with within the rising markets forex house – and the Mexican Peso has been among the many greatest performers. Now, with the seasonally weak US Dollar serving to pave the trail, the Peso could also be arrange for a robust April and begin to 2Q’21 (in keeping with our 1Q’21 Top Trade Opportunities and 2Q’21 Top Trade Opportunities).
Mexican Peso Financial Calendar – Remainder of Week
The largest occasion of the week has but to come back to go for the Mexican economic system, leaving open the opportunity of extra volatility within the second half of the week for MXN-crosses. Due out on Thursday, the January Mexican inflation charge (CPI) is predicted to point out an uptick from +3.76% to +4.15% (y/y), according to a Bloomberg Information survey.
Shifting into the bottom impact interval across the begin of the pandemic, greater inflation could serve to tamp down dovish machinations at Banxico in latest months (which runs towards their longer-term fame of being comparatively hawkish in comparison with different regional central banks), giving the Mexican Peso additional room to rally alongside different threat belongings.
Recommended by Christopher Vecchio, CFA
Trading Forex News: The Strategy
USD/MXN Fee Technical Evaluation: Each day Chart (February 2020 to April 2021) (Chart 1)
Within the prior Mexican peso forecast, it was famous that “by returning above the 61.8% retracement, USD/MXN charges would shift from a impartial perspective to a bullish perspective. Nonetheless, USD/MXN charges try a basic turnaround Tuesday, with a bearish piercing candle forming on the day by day chart.” This marked the excessive for the 12 months for USD/MXN, which has been on a gradual decline since then.
In flip, the uptrend from the January, February, and March swing lows has been misplaced, and this week’s worth motion has established a decrease month-to-month low relative to March. Concurrently, USD/MXN has dropped under two key Fibonacci ranges: the 38.2% retracement of the April 2011 low/April 2020 excessive vary at 20.3215; and the 76.4% retracement of the 2020 low/excessive vary at 20.2349.
The momentum profile has turned bearish. USD/MXN charges are under their day by day 5-, 8-, 13-, and 21-EMA, which continues to be in bearish sequential order. Each day MACD is trending decrease whereas under its sign line, whereas day by day Sluggish Stochastics are nestled in oversold territory. If worth motion since early-March has resolved itself within the type of a possible head and shoulders sample, it might maintain that extra draw back in direction of the yearly lows could also be within the playing cards.
MXN/JPY Fee Technical Evaluation: Each day Chart (February 2020 to April 2021) (Chart 2)
The last time we checked in, it was famous that “whereas the pair isn’t in any totally different place than it was at first of this month or final, buying and selling is a operate of worth and time, and the passage of time has seen MXN/JPY arrive on the rising trendline from the April and September 2020 lows – its pandemic uptrend. The preliminary rebound at trendline help arrives concurrently with the 50% Fibonacci retracement of the 2020 excessive/low vary at 5.112. A break above the day by day 21-EMA would sign better potential for a return to the March excessive round 5.200.”
MXN/JPY rallied quickly thereafter, clearing the day by day 21-EMA en path to yearly highs. Now, the pair finds itself testing the descending trendline from the November 2014 and February 2020 highs, a multi-year trendline that additionally represent resistance in a symmetrical triangle that’s shaped because the begin of the coronavirus pandemic.
Worth motion stays bullish. MXN/JPY charges are above their day by day 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Each day MACD continues to climb above its sign line, whereas day by day Sluggish Stochastics are holding in overbought territory. Given this context, the latest sideways drift in MXN/JPY charges over the previous few days could merely be a pause earlier than recent highs are reached anew. The 76.4% Fibonacci retracement of the 2020 excessive/low vary at 5.579 could also be preliminary resistance if the bullish breakout ensues.
Recommended by Christopher Vecchio, CFA
Building Confidence in Trading
Utilizing a Proxy to Observe USD/MXN Retail Positioning
With respect to the distinction in efficiency between USD/CAD and USD/MXN charges in latest weeks, it ought to be famous that the Canadian economic system is extra unbiased from the US economic system than is the Mexican economic system. Whereas america is each international locations’ largest buying and selling companion, over 80% of Mexico’s exports go to america (in comparison with close to 70% for Canada), whereas 30% of Mexico’s GDP is derived from financial actions involving america (in comparison with 20% for Canada).
The shut proximity of each international locations given their commerce relationship with america additionally implies that their currencies are inclined to commerce similarly as properly. In different phrases, there’s a affordable foundation of expectation for USD/CAD and USD/MXN charges to commerce similarly.
But the mix of upper vitality costs and better US Treasury yields has provoked a decoupling between USD/CAD and USD/MXN within the near-term. At current, the 5-day correlation between the pairs is presently -0.12 whereas the 20-day correlation is -0.18. One week in the past, on March 2, the 5-day correlation was +0.76 and the 20-day correlation was -0.33.
IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (April 7, 2021) (CHART 3)
USD/CAD: Retail dealer information reveals 58.29% of merchants are net-long with the ratio of merchants lengthy to quick at 1.40 to 1. The variety of merchants net-long is 1.00% greater than yesterday and 1.72% greater from final week, whereas the variety of merchants net-short is 16.03% decrease than yesterday and 4.96% greater from final week.
We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests USD/CAD costs could proceed to fall.
Positioning is extra net-long than yesterday however much less net-long from final week. The mix of present sentiment and up to date modifications provides us an extra blended USD/CAD buying and selling bias.
Recommended by Christopher Vecchio, CFA
Traits of Successful Traders
— Written by Christopher Vecchio, CFA, Senior Forex Strategist
-- to www.dailyfx.com