The narrowing yield differential in this pair is something to keep an eye on.
USD/MXN
The fundamental narrative that's been driving this pair right now is a little bit of a squeeze on the carry trade. And when you look at the longer-term charts, we are in an area that has been pretty important support a couple of times during the 2023 and 2024 trading years.
Top Regulated Brokers
What's interesting is that the Central Bank of Mexico recently cut interest rates down to 6.5% in May and strongly signaled that they are probably pausing. That effectively ends their easing cycle, but it keeps it locked in. Meanwhile, the Federal Reserve's latest hawkish dot plot this week, despite leaving rates unchanged, has the markets digesting the reality that rates will stay elevated for longer, and possibly we could see a 25-basis point hike coming out of the United States.
The narrowing yield differential is slowly eroding the appeal of the Mexican peso, and add in the fact that Mexican GDP in the first quarter was an actual contraction, it was -0.6%, and Moody's recently downgraded its sovereign rating, you have a situation where it's allowing the US dollar to catch a little bit of a bid.
Technical Analysis and Key Levels
Now, I'm still somewhat hesitant to buy this pair, but I think if we break above the 17.50 pesos level, you have to start to think that maybe things turn around. The interest rate differential shrinking does lessen the body blow of getting long a carry trade pair. And if we see some type of flight to quality, as it were, it might be a nice potential short-term trade.
Generally speaking, this is a market that does favor the Mexican peso when things are going well in the United States because of the massive amount of Mexican exports that head north of the border, but I think what we are trying to determine now is whether or not this area just above 17 pesos will show a little bit of resiliency. This is a market that I think you're really watching the 17.50 level.
If we see failure there, it's probably a short-term selling opportunity. If we blow through 17.60, then we might see a sustained recovery towards the 18.00 level.
In general, I think this is a scenario where, ironically, it's a little bit of a short-term swing trading opportunity based on 2 or 3 days at a time, which is not generally how I like to trade this pair. It does tend to trend for very long periods of time, but right now, I think there are so many moving pieces that we need to be aware that there could be a potential short squeeze just waiting to happen.
Above 17.60, I'd be very concerned about that. I don't see us breaking the 17 pesos level anytime soon, so any selling opportunity at 17.50 pesos, I think, is probably good for a day or 2, and then you take your profit.
Ready to trade our daily Forex forecast? Here’s a list of some of the top Mexican forex brokers to choose from.