The US dollar initially dropped against the Mexican peso on Friday, as traders were looking for yield. However, we have since seen a bit of a bounce.
USD/MXN
The US dollar initially fell during trading on Friday but has recovered a little bit against the peso as we continue to see a lot of movement in the interest rate markets. This obviously has a major influence on the US dollar in general and that means that it will have an outsized influence on emerging market currencies such as the Mexican peso. Keep in mind that the interest rate differential most certainly favors Mexico in this particular scenario, but we also have to keep in mind that the risk premium out there, especially in the Middle East, is going to favor the US dollar.
We have formed a little bit of a double bottom recently and therefore I’m watching this pair very closely. I don’t really like buying and it has nothing to do with whether or not I think this market can go higher or lower. I don’t like paying the massive interest rate differential to get long of the dollar against the peso, so therefore I do tend to favor the downside, but right now we just do not have that setup.
Interest Rate Differentials and Technical Levels
If that’s going to be the case, we have to be very cautious here. The 50-day EMA sits just above and that could cause a little bit of a problem here right around the 17.50 level. That’s an area that’s been important more than once. If we can break above there, then I start to look at the 17.80 level as an area that if we show signs of hesitation or weakness, I might sell into.
After that, then we have the 18 level which also features the 200-day EMA. To the downside, the 17.20 level has been supported, with the 17 level most certainly being a large and psychologically significant number that I think also supports this market. So, we don’t really have a sell signal right now, but I am looking to short this market as soon as we show signs of exhaustion.