USD/MXN Forecast: Testing Trendline

• The US dollar saw a modest rebound against the Mexican peso on Wednesday as traders adjusted positions ahead of the FOMC decision and press conference.
• Despite short-term rallies, the broader trend favors peso strength driven by economic ties and rate differentials.

During the trading session on Wednesday, the US dollar rallied slightly against the Mexican peso as traders likely engaged in some short covering ahead of the FOMC interest rate decision and, perhaps more importantly, the FOMC press conference. Ultimately, this pair tends to behave somewhat counterintuitively compared to typical market moves, largely because the Mexican economy depends heavily on exports to the United States. Therefore, the stronger the U.S. economy, the better Mexico tends to perform.

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As Goes the US, So Goes the Peso

In other words, if the U.S. economy appears poised to continue strengthening, it is likely to support the Mexican peso. Furthermore, it is worth noting that the interest rate differential favors the peso, as the pair has been in a downtrend for some time. Many traders are taking advantage of that.

Short-term rallies can occur, but as has been the case repeatedly over the past seven or eight months, the Mexican peso continues to attract buyers whenever the US dollar rallies. It would likely be difficult to take a long position in this market unless it breaks above the 18.80 level, or possibly even the 19.00 peso level.

All things considered, the market appears set to move lower, perhaps testing the 18.20 level. A breakdown below 18.20 could open the door to a move toward the 18.00 peso level, which has historically been significant. Overall, traders looking to benefit from the interest rate differential should view rallies as opportunities to gain value. This remains an attractive carry trade and will likely continue to be so as the Federal Reserve is expected to cut rates a couple of times in the near future.

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