USD/MXN: Dollar Weakens Against the Peso as the Broader Market Gets Bearish on US Rates

The US dollar weakened against most currencies today and the peso took advantage gaining 0.75% so far today.

Market sentiment on US rates has turned bearish over the past few trading sessions with the DXY down 0.70% since last Monday. The peso has continued to rally on the back of this trend and may have more room as we face inflation figures for both countries this week.

Tomorrow we have inflation data from Mexico, we’re expecting a small increase in the YoY inflation from 4.4% to 4.5%. While monthly inflation is expected to show a higher increase going from 0.09% last month to 0.36%.

From the US we’ll get inflation data on Wednesday, forecasts also show a small increase in YoY inflation, from 3.2% to 3.4%. While core inflation is expected to decline slightly to 3.7% from 3.8%. A mixed reading could create some large wings in the markets immediately after the data.

For Thursday we’ll also get Jobless Claims and PPI data for the US, which we’re expecting to show mixed results between core data and monthly and yearly. Here’s what we’re expecting Thursday:

• Core PPI MoM – 0.2% previous 0.3%
• Core PPI YoY – 2.3% previous 2.0%
• PPI MoM – 0.3% previous 0.6%
• PPI YoY – 2.2% previous 1.6%
• Jobless Claims – 215k previous 221k

Thursday we’ll have Industrial production for Mexico, here we’re forecasting an increase in YoY data from 2.9% to 3.4%. the number would also be in line with Banxico’s expectations for expansion mentioned in the minutes from last week.

So far, inflation in Mexico has been coming down more slowly than in the US. Economic expectations remain buoyant in both countries. However, the interest rate spread between the 2 currencies favors the peso. And is likely to do so for some time as the Mexican central bank has more room to cut rates.

Technical View

The day chart for the USD/MXN shows the FX pair in a full bear trend. The recent breakout from the consolidation area (blue rectangle) confirms the downward trend has gained steam again. Compared to other FX pairs this one is showing a bullish trend for the quoted currency, and I would expect that to continue.

The market hasn’t traded at these levels for several years. So, the main resistance and support areas go way back. The next support level is at 15.5422 and was set back in March and May 2015.

We have to take note of the RSI level, which is reaching oversold territory. Today’s reading is currently 28.7. Although we need the RSI to turn back above 30 to trigger a possible correction, on the day chart it’s often sufficient for the RSI to just touch the upper or lower boundaries.