USD/MXN: No longer a teenager – Rabobank
Christian Lawrence, Senior FX Strategist at Rabobank, suggests that this week’s data schedule is relatively busy in Mexico and in light of this, as well as an abundance of event risk in the week after, USD/MXN price action could prove somewhat choppy in the coming sessions although Rabobank’s bias remains for further MXN depreciation.
Key Quotes
“Around spot, we see 20.67/9 as a key level given it is the confluence of the 138.2% Fibonacci projection from the August-September rally, Monday’s intraday high and the top of the triangular technical formation. From a purely technical perspective, a confirmed break of that continuation triangle would provide a price target of 23.5. Looking at support, the 20 handle is the key level on the downside and below that, 19.923 and then 19.50 will be key. The technical picture for USD/MXN suggests that the pair is in a bullish trend according to a number of signals including the ADX, Bloomberg Trender and proper order of moving averages. Our own ‘Rabo Trend’ tool also suggests a bullish trend.”
“Interestingly, USD/MXN is positively correlated to the MX-US 10yr government bond yield spread. This implies that as the spread widens in favour of Mexican rates outperforming UST rates, MXN actually depreciates against USD. That might sound counter-intuitive to those expecting rate differentials to drive FX but actually regular readers will be more than aware that to our mind this dynamic makes sense as USD/MXN is primarily driven by global risk factors over and above rate differentials.”
“We maintain the view that the biggest risk to MXN performance next year will be any move to a more protexchctionist stance from the US. With over 25% of Mexican GDP a result of exports to the US and with income from remittances key in supporting domestic demand, if Trump follows through with his pre-election pledges of renegotiating/destroying NAFTA, implementing tariffs on trade or stopping/deporting immigrants then activity in Mexico will suffer greatly.”