- The interest rate differential continues to be a main feature of this downtrend, but it seems to be struggling to break the support level underneath.
The US dollar rallied a little bit during the trading session here on Thursday as we continue to see a lot of noise in this pair, but I also think that we see the 17.10 level offering significant support.
In fact, I think you've got a situation where a bounce from here more likely than not will then open up the possibility of a move to the 17.5 level. The 17.5 level is an area that's been resistant previously and it is an area where the 50-day EMA currently resides.
If we can break above there, then you can start to have a little bit more of a deeper conversation about the idea of the US dollar recovering. That being said, signs of exhaustion near the 17.5 level would be very interesting to me as we are in a downtrend and of course the interest rate differential pays you to be short of this market.
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Targets and the Carry Trade Outlook
If we can break down below the 17 pesos level, then it opens up a move down to 16.5, which is an area that has been important multiple times in the past. This has been a very strong trend to the downside and while you could make an argument for the dollar being oversold, I won't be a buyer of this pair because of the interest rate differential.
Yes, this pair can really take off to the upside but quite frankly if the US dollar is going to suddenly accelerate in more of a risk-off type move, you'll see that in other currencies that aren't as expensive to short, so for example maybe we'll see it in the Euro against the dollar or the pound against the dollar.
Because of this, I'm looking for the carry trade possibility, but we are getting really long in the tooth on this so I think about another 0.5 peso on a breakdown might be reasonable, but to see a major collapse is probably asking a lot here.
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