USD/MXN Week Ahead: Quick Rebound Shows Upside is Limited

Main USD/MXN Talking Points:

• USD/MXN spikes and then corrects to end the week

• Banxico seems divided of the future path of monetary policy

Another week comes to a close and USD/MXN has remained pretty much unchanged. Whilst the week started off pretty flat, the Mexican Peso fell on Thursday after Banxico released its meeting minutes, which allowed USD/MXN to recover some upside momentum.

The report showed that central bankers are divided on the future of monetary policy, as some believe there is no more room for interest rate cuts whilst others wish them to keep on coming. As a reminder, Banxico has cut rates 6 times this year, taking the benchmark from 7.25% to 4.50% in less than 9 months.

Mexicos economic data continues to show a slump in the economy, as data reported this week showed that the Mexican economy had shrunk 18.7% on an annualized basis in the second quarter of the year. Data on trade showed the industry had started picking up but uncertainty about the future of emerging market economies might keep future trade weak.

On top of that, tropical storm Laura has been threatening the Gulf of Mexico for several days, with the possibility of putting safe havens in demand again, specially as widespread media coverage can get the fear ball rolling. Despite this, the US dollar seems to be in a very weak place at the moment, with little hopes of getting out in the short term.

The US handling of the pandemic has lead to irreparable damage to the economy, which has left the dollar in a weak position, losing its carry trade value against many other currencies. This is likely to limit the upside in USD/MXN, which, as seen on Thursday, is likely to run into key resistance as soon as it attempts to push higher.

This means short-term direction will be provided by Mexican fundamentals, with fear and overall uncertainty a big factor of any upside corrections. The outlook continues to be bearish in the medium term, but volatility is likely to creep up as we head into the new month, and traders must watch out for short-term reversions.

USD/MXN 4-hour chart (02August – 28August 2020)

From a technical standpoint, USD/MXN remains on the path towards the descending trendline support, which now hangs around the 21.75 area. Fridays price action confirmed that 21.84 is a key support area whilst upside continues to remain capped above 22.20.