Last Update: March 22nd, 2021

The USD/MXN has been on a long-term bullish trend as far back as the charts show, and the uptrend has picked up pace in the last decade. But, at the moment the risk currencies are advancing against the USD, and so is the Mexican Peso. That means that the USD/MXN has been retreating since April last year, and the picture is very similar to that of the USD/CAD, since both are commodity and risk currencies.

The US Dollar has been gaining against the Peso for decades; the chart above shows that the USD/MXN was trading at around $ 2.50 – $ 3.50 in the ‘90s, while in April last year, this forex pair pushed above $ 25, after the strongest surge ever, which means a 10-fold increase in three decades. The uptrend in USD/MXN used to be quite consistent, with no major setbacks and moving averages keeping the pressure on the upside all the time. However, since April 2020, the price has been retracing lower and buyers haven’t put up much resistance, as the USD has continued to decline. But, the price has been hanging around the $ 20 area for a couple of months now, which might signal the end of the pullback lower.  

Recent Changes in the MXN Price

Mexico is an emerging market which makes the Mexican Peso a risk currency, similar to the currencies of the BRICK countries. Emerging market currencies used to be on a long-term bearish trend, as was the MXN. One of the reasons for this was the increasing US imports from Mexico, which kept the peso under pressure. But fundamentals seem to have changed. The economy of Mexico is largely affected by the economic situation across the border in the US, which has been performing quite impressively since the lock-downs ended in May. But politics are keeping the USD down, which is benefiting the Mexican Peso and other risk currencies. We will cover these issues below. The decline since April last year might be overstretched now and we could see a reversal or a bounce soon, although fundamentals look quite mixed for both currencies at the moment.

USD/MXN Live Chart

Risk currencies should have been declining since March 2020, with the coronavirus keeping the risk sentiment subdued in financial markets, as governments keep turning restrictions on and off and the global economy goes from a recession to a strong rebound, then back into another recession. But, the excessive amount of money that has been flowing into the markets from governments and central banks across the globe, has been keeping them going. On the other hand, the USD has been declining for political reasons, because economic fundamentals seem solid right now. The large amount of USD injected into markets has also been adding to the weakness of the USD, and more money is on the way in the US, which will benefit developing countries like Mexico and the Peso. However, the rising US Treasury yields and the technical picture make it look like this pair is oversold, so the USD/MXN bears should be seeing red flags because this might well be the end of the bearish retrace before the bullish trend resumes again.  

Better Fundamentals in the US

During the initial COVID-19 pandemic crash, the economomies of both the US and Mexico went through a major recession, ending 2020 in contraction. But the US economy seems to have diverged in the second half of 2020, after the rebound in summer last year, as it continues to keep up a good pace of expansion. Fundamentals were quite solid for Mexico before the coronavirus, as this emerging economy was growing continuously, while exports to the US were and still are also increasing constantly. But, the Mexican economy is having some trouble with the new coronavirus restrictions, which are dampening the demand for Mexican exports from places like Europe.

Mexico has been a US trading partner since 2019, at a total of $ 614.5 billion. Imports from the US amounted to $ 256.4 billion, while exports totaled $ 358.1 billion. This means that Mexico has a $ 100 billion surplus with the US, therefore it needs a strong USD, otherwise the revenue will decline in value. However, the fundamentals have skewed somewhat since the start of the coronavirus pandemic. US manufacturing and industrial production have been increasing and are now close to record highs, while the Mexican economy has been slowing again this winter, after the rebound in summer. According to Moody’s Investors Service, who released a report in January, Mexico will not reach its pre-coronavirus pandemic economic output levels of 2019 until at least 2023.

Market Sentiment During COVID-19 Times

The sentiment towards different assets and different currencies has been abnormal during these coronavirus times. Risk assets have been increasing, some of which can be explained by the cash that has been flowing, through all the monetary programs from central banks and stimulus packages from governments across the world. The USD/MXN surged more than 7 cents during the initial panic, but it has been retreating lower since April, although, as we mentioned, the retrace down has been much weaker than in other USD pairs. One of the reasons for the surge was the fear of what might happen to the emerging markets, since they don’t have as much to fall back on as the developed economies and governments have. The uncertainty is still high, hence the slow retreat during periods of USD weakness since April. So, overall the Mexican economy is at the mercy of the US economy, which will keep the trend bullish for this pair for a long time, despite the recent pullback. 

Interest rates were above 8% in Mexico last year, but the Bank of Mexico started cutting them at the end of 2019, and this year, they slashed them drastically, as the global economy sank. Although they will remain on hold for now, as the president of the BoM Alejandro Díaz de León said. As of September 2019, the main interest rate stands at 4.25%, while the FED has interest rates at 0.10%, as we covered in our Economic Calendar. This difference in interest rates looks to be in favour of the Mexican Peso, but the higher rates in Mexico leave more room for the central bank to cut them further. Markets trade on expectations rather than on the actual events, so this leaves the MXN vulnerable to more rate cuts from the Bank of Mexico. Some economists expect more cuts to be implemented in the next few meetings, so the pullback lower in the USD/MXN should end soon. 

2021 has barely kicked off, and it’s already proving to be a tough go for emerging market currencies. While broadly, more US fiscal stimulus is good news for risk appetite, EM FX has been double tapped by increasing lockdowns and rising US Treasury yields. A short-term environment of weaker consumer demand from developed Western economies is taking shape and denting the growth currency space – which is just the one that EM FX occupies.

But the Mexican Peso, despite finding itself on a weaker footing through the start of the year, is still performing rather well. All things considered, the US Treasury 10-year yield has risen to its highest level since March 2019, but USD/MXN rates are still holding below their closing highs of December 2020. Contextually, the price action suggests that the recent reversal higher may merely be a breather before we see another push lower. Although, the bets against the USD have increased to their highest level in about a decade, which suggests that USD shorts might decline from now on. Besides that, analysts say that the Treasury yields, which declined for most of 2020, have been the key driver. Now that they have increased above 1% again and are expected to increase further, they could cause USD/MXN sellers more pain.

The USD/MXN was trading between $ 2 and $ 3 in the first half of the ‘90s, but it jumped higher in the mid-‘90s, which marked the beginning of the long-term bullish trend, and it has been bullish since then, having gained around 1,000%. During this time, moving averages have been doing a good job of providing support during pullbacks lower, or during consolidations, on both the monthly and weekly charts. The smaller moving averages have been providing support when the bullish trend has been stronger, while larger moving averages have provided support when the trend has slowed and pullbacks have been deeper. On the monthly chart below, we see that the price in the USD/MXN has gone up in legs, with the last surge being in the first few months of 2020. The USD/MXN was trading in a triangle from 2017, but it broke out early last year, after the price bounced off the 50 SMA (yellow), when the coronavirus broke out. But the surge ended in April when the USD turned bearish. It has been retreating lower since then, but the retrace might have come to an end now. The 50 SMA (yellow) and the 100 SMA (green) have been providing support on the monthly chart, while the stochastic indicators are now oversold, and the 50 SMA is acting as support again, both of which point to a bullish reversal, since the retrace seems complete and the main trend remains bullish.

The retrace seems complete on the monthly chart

On the weekly chart, we saw a jump in the 50 SMA in the last week of September, from below 21 to 22.60, after the price retreated for several months. But, the 20 SMA (gray) stopped its climb once again, providing resistance for the second time this year. The USD/MXN has reversed lower again, but the bearish move should end at some point, and the bullish trend will resume, as the monthly chart above suggests. The price was declining until 2 weeks ago as the USD continues to slip lower, but USD/MXN has bounced off the 200 SMA (purple) which has been the ultimate support on the weekly chart. This moving average was broken briefly at the beginning of last year as well, and the price turned bullish after that, surging nearly 8 cents higher. So, if the 100 SMA (green) which is acting as resistance breaks soon, we might see USD/MXN resume the larger bullish trend. But, we are not going long on this pair right now, until we get a bullish reversing signal, such as a pin or doji candlestick, in one of these time-frame charts. 

The retrace lower is not over yet on the weekly chart

On the daily chart though, we see that the 100 SMA (green) has been providing resistance, but the 50 SMA (yellow) has been the ultimate resistance for this pair since the bearish reversal in April last year. It has been stopping the retraces higher and it keeps pushing the price lower. In the last two days, the USD/MXN has been increasing, and now the price is heading for the 50 SMA again. But we will see whether this is going to be just another retrace before the bearish trend resumes, or if buyers will push above the 50 SMA, which might be the beginning of the larger bullish reversal.  

Will the 50 SMA reject USD/MXN again?