Mexican Peso Forecast: Muddling Through Weak Data – Setups in MXN/JPY, USD/MXN

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Mexican Peso Outlook:

  • The Mexican Peso’s rebound over the past few days was once again cut short by weaker economic data: both the 2Q’21 and June Mexican GDP figures missed
  • Surging delta variant COVID-19 infections alongside a relatively low vaccination rate for Mexico may continue to hold back the Peso.
  • We can use the IG Client Sentiment Index for USD/CAD rates as a close proxy for USD/MXN exposure.

Peso in a Pickle

There’s been a shift back into risk-correlated assets in recent days, driven in part by speculation that the Federal Reserve will slow-walk its taper plans amid surging delta variant infections in the United States. Helping fuel a rebound in commodities, investors have become more amiable towards higher yielding and growth-sensitive currencies. But there has been a notable laggard: the Mexican Peso

Despite gains at the start of the week, the Mexican Peso has once more run into a wave of recent economic data that has underperformed expectations, short-circuiting any semblance of a rally. Building on the disappointing June Mexican retail sales report and the August Mexican inflation rate data, the 2Q’21 and June Mexican GDP figures came in weaker than anticipated earlier today.

Nearing critical technical junctures, USD/MXN’s decline and MXN/JPY’s advance may be stymied for the time being as markets digest these otherwise discouraging fundamental developments.

USD/MXN Rate Technical Analysis: Daily Chart (August 2020 to August 2021) (Chart 1)

Mexican Peso Forecast: Muddling Through Weak Data – Setups in MXN/JPY, USD/MXN

The bullish breakout experienced by USD/MXN rates looked in danger earlier this week after the pair came crashing back down to the descending trendline from the March and June swing highs. But was once resistance – the 38.2% retracement of the April 2011 low/April 2020 high range at 20.3215 and the 76.4% retracement of the 2020 low/high range at 20.2349 – appears to have turned into an area of support. Furthermore, USD/MXN is finding support at its daily EMA envelope, and with daily MACD still trending higher, it’s too soon to suggest that the bullish breakout has run its course.

MXN/JPY Rate Technical Analysis: Daily Chart (March 2020 to August 2021) (Chart 2)

Mexican Peso Forecast: Muddling Through Weak Data – Setups in MXN/JPY, USD/MXN

Ever since reaching the 76.4% Fibonacci retracement of the 2020 high/low range at 5.579 at the start of July, MXN/JPY rates have decoupled from other risk assets and have slowly dripping lower. The pair finds itself dealing with a significant test, however, fighting to retake the uptrend from the April 2020 and March 2021 lows – the pandemic uptrend, as it were.

Momentum remains negative – MXN/JPY is still below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order – while daily MACD declines below its signal line and daily Slow Stochastics remain in oversold territory. Failure to retake 5.430 would suggest a deeper setback towards the 61.8% Fibonacci retracement of the 2020 high/low range at 5.330 could be in play through the end of August.

Using a Proxy to Track USD/MXN Retail Positioning

With respect to the difference in performance between USD/CAD and USD/MXN rates in recent weeks, it should be noted that the Canadian economy is more independent from the US economy than is the Mexican economy. While the United States is both countries’ largest trading partner, over 80% of Mexico’s exports go to the United States (compared to near 70% for Canada), while 30% of Mexico’s GDP is derived from economic activities involving the United States (compared to 20% for Canada).

The close proximity of both countries given their trade relationship with the United States also means that their currencies tend to trade in a similar fashion as well. In other words, there is a reasonable basis of expectation for USD/CAD and USD/MXN rates to trade in a similar fashion.

At present, the 5-day correlation between the pairs is currently +0.10 (easily explained by CAD outperforming MXN over the past week) while the 20-day correlation is +0.76. One week ago, on August 18, the 5-day correlation was +0.81 and the 20-day correlation was +0.56.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (August 25, 2021) (CHART 3)

Mexican Peso Forecast: Muddling Through Weak Data – Setups in MXN/JPY, USD/MXN

USD/CAD: Retail trader data shows 75.39% of traders are net-long with the ratio of traders long to short at 3.06 to 1. The number of traders net-long is 34.93% higher than yesterday and 43.92% higher from last week, while the number of traders net-short is 20.73% lower than yesterday and 38.94% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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