USD/MXN is dropping - there are reasons for that

Key indicators

Performance in 2020: -2%

Last day range: 18.5657 – 18.6048

52-week range: 18.5680 - 20.2528

What’s happening?

The USD trades at 18.5740 against the Mexican peso – that's the lowest the USD/MXN has been to since October 2018.

Wait. Peso?

Yes, the Mexican peso. Unfortunately, time and intensity of global events, like the Coronavirus disturbing the world, do not let us pay as much attention to the exotic currencies as they deserve. However, we will try to correct this oversight now and give you more space for trading maneuvers and operate more exotics. Therefore, peso now.

So what’s happening with peso?

Banco de Mexico cut the rate to 7%, making it the fifth in a row rate reduction. Given the fact that its inflation is the highest among the G-20 member countries and goes ahead of the domestic economic growth, the Mexican financial authority has a lot of space for monetary easing. In fact, observers comment that the end of 2020 is likely to see the rate cut to 6%.

Wait. The bank goes dovish, and the currency gains?

Yes, you are right. Normally, if the central bank of a country applies monetary easing and expands the influx of national currency in the market, the value of the currency drops. Especially, against such strong counterparts like the USD.

But the case of the Mexican peso is a bit special, that’s why it doesn’t follow the general rule. Primarily, that’s for certain fundamental reasons.

What are the reasons?

First, the US-China trade war has ended. We have already forgotten about that, but this has been in place for two years – compare that to the Coronavirus which has been out there for merely a month. The proportion of the impact is relative to its duration. Peso is a risky asset against the US dollar, and even with the Coronavirus raging around, the markets do not take that as a reason to get depressed. The impression is mixed, at most. That’s why the liberation of the market from the risk-avoiding mood over the US-China trade agreement still has its lasting effect and supports the MXN.

Second, during his recent speech in Davos, US President Donald Trump has underlined the new trade agreements with other countries. He specifically stressed on the new Canada-US-Mexico agreement replacing NAFTA. For Mexico, which has been suffering from disappointing economic dynamics these years, that should sound optimistic in the promise of future investments and refreshed trade flows. Once again, that supports peso.

So the MXN will rise then?

Don’t get carried away too much. Yes, there are fundamentals supporting the Mexican peso now, but the same fundamentals speak against it in the long-term. The main one is: the Mexican economy is weak. Therefore, the question for the MXN is not where it reaches against the USD, but how long it manages to stand against it and where it drops to once it’s exhausted.

Technical levels

Resistance 18.8240

Support 18.5040

TRADE USD/MXN

Gaspar Markosyan