My contrarian USD/MXN forecast was right: what next for Mexico peso?

October 19, 2023 07:27 AM PDT | By Invezz

My contrarian USD/MXN forecast was right: what next for Mexico peso? — Image source: Invezz

DXY and US risks remain

The Mexican peso was one of the top-performing emerging market currencies this year. At its peak in August, the currency was up by over 25% from its lowest level in 2021. This rally happened as the Mexican economy took advantage of the rebounding American economy.

Mexico has done well in the past few months, helped by the concept of nearshoring as tensions between China and the US rise. Many companies, including Tesla, are moving some of their operations to the country.

Recently, however, the USD/MXN pair has reversed as the US dollar index has jumped. The DXY index, which tracks the greenback against a basket of currencies, rose to $107, the highest level since November last year.

The US dollar has soared as the Federal Reserve has remained quite hawkish in the past few months. It has hiked rates to between 5.25% and 5.50%, the highest level in more than 20 years.

As a result, American Treasuries yields have soared to their highest levels in decades. The 10-year and 30-year yields have jumped to 5.01% and 4.85%, respectively. Shorter-term bond yields have also soared, pushing many people in Mexico to start moving to the safety of the USD.

The USD/MXN pair has also rebounded because of the dovish decisions by the Mexican central bank. It has left rates unchanged in the past few minutes and pointed to a rate cut in mid-2024. This happened as Mexico’s inflation continued to fall.

USD/MXN technical analysis

USD/MXN chart by TradingView

I wrote a relatively contrarian USD to MXN forecast in August when the pair was slipping. At the time, I predicted that the pair would bounce back, citing the falling wedge pattern that was forming. A wedge is one of the most popular reversal patterns. The pair also formed a small double-bottom pattern at 16.64.

Recently, the USD/MXN price has moved above the 200-day moving average, signaling that buyers are in control. Therefore, the pair will likely continue rising as buyers target the key resistance point at 19.40, the lowest swing in March 2022.

The post My contrarian USD/MXN forecast was right: what next for Mexico peso? appeared first on Invezz

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