The US dollar initially plunged on Friday as it continued to lose ground against the Mexican peso. The Central Bank of Mexico has recently raised interest rates, so it does make sense that the peso would gain against the US dollar, despite the fact that the Federal Reserve is talking about cutting back on its bond buying program. Nonetheless, it has gotten a bit overdone, and by the end of the day we not only plunged, but we turned around to show signs of a nice recovery at the crucial 200-day EMA.
By forming the nice hammer that is on the chart, it does suggest that a bounce is coming, perhaps reaching towards the 50 day EMA above at the 20.75 pesos level. Whether or not we can continue higher than that is a completely different question, and would probably would have a lot to do with risk appetite more than anything else. If there is a sudden fear in the market, the US dollar does tend to strengthen in general.
On the other hand, if we turn around and break down below the bottom of the hammer, that would be a very negative turn of events and could open up even more selling. That could open up the possibility of a move down to the 20 level, but we are so overdone at this point I suspect that it is probably going to be easier to simply bounce then it will be to continue the overall negativity. This will be especially true in the short term, and we will of course have to see what effect the jobs figure on Friday has for risk appetite in general. Between now and then, one would assume that we will see more risk-taking on, but sooner or later markets tend to correct and that is what I think we are probably going to be paying the most attention to whether or not there is going to be any follow-through. At this point, it is very unlikely that the market could continue to fall at this rate, so we could see a pretty severe bounce. However, that does not necessarily mean that the market will be anywhere near changing its overall attitude anytime soon.
