The month of February has been negative for the US dollar against the Mexican peso with traders continuing to take advantage of the interest rate differential and the swap at the end of each day.
USD/MXN
The month of February has been negative for the US dollar against the Mexican peso again, which makes quite a bit of sense considering that there is a strong interest rate differential in favor of Mexico in this currency pair. All things being equal, that should continue to be part of the game here, but it's also worth noting that we are approaching pretty significant support in the form of 17.00 and this is an area that has been important in 2024 and 2016.
Because of this, I think it is going to be difficult to break down quite a bit further from here, and we could be looking at a market that is trying to find its bottom.
Economic Dynamics and the March Strategy
That being said, it's a huge process and you have to understand that the dynamics in the US dollar versus the Mexican peso is quite a bit different than many other places in the sense that interest rate differential favors the Mexican peso, but at the same time, the better the US economy does, the better the Mexican economy does as Mexico is the world's largest exporter into the United States.
Ironically, the better that the US economy does in this case, the worse the US dollar does. Traders love selling this pair because of the interest rate differential and I think that will be the story in March, where we have short-term rallies that are sold unless something goes horribly wrong in the US.
If the US economy starts to tank, then you can make an argument about turning things around, but even then, I would not be somebody who wanted to buy this pair because I don't want to pay the interest rate differential on a daily basis. It got quite expensive.
Because of this, I'm looking at the 17.50 level as a bit of a ceiling, followed by 18.00. If we break above 18.00, that would be extraordinarily negative for the carry trade that so many traders have enjoyed for about a year now. So, while we are oversold, I look at those bounces that could come along as opportunities.