The US dollar initially tried to rally during the trading session on Tuesday but gave back gains to reach back towards the 20.28 pesos level. The 20.25 pesos level has been an area of support previously, but the fact that we are forming a bit of an inverted hammer does suggest that we could get a bit of follow-through if we break down through that level. At that point, I would anticipate that the USD/MXN pair will go looking towards the 20 MXN level.
Keep in mind that the Mexican peso is highly sensitive to a couple of different things, not the least of which would be the interest rate differential between the United States and its southern neighbor. Furthermore, the Mexican economy is sensitive to the price of oil, which is helping right along with the interest rate differential between the two economies. That being said, there is the possibility of a run towards safety, which does favor the US dollar in general.
You could make an argument for some type of big, massive, ugly head and shoulders pattern, but I think that is probably a bit of a reach. I believe at this point in time when you look around the Forex world, the carry trade is back in vogue, and that favors the Mexican peso. In fact, I shorted the EUR/MXN pair today, simply because it has already broken down. That brings up a point, even if you are not trade in this particular pair, you can use this currency pair to trade the Mexican peso against most other currencies. It shows relative strength, and the fact that the Euro has been falling against the US dollar suggests that it is even weaker than the greenback against the Mexican peso.
Ultimately, if we turn around a break above the top of the inverted hammer that formed for the trading session on Tuesday, then the market could go looking towards the 200 day EMA which is currently at the 20.47 MXN level. In general, this market will continue to be very noisy, and it is decidedly negative at this point in time. As long as the carry trade is in vogue around the currency markets, that will favor a downward motion or a fading of the rallies. (If you wish to get an idea as to how the carry trade is going, pay close attention to whether or not the JPY and CHF currencies are continuing to fall.)
