- The US dollar has spent quite a bit of energy during the Friday session, initially gaining significantly against the Mexican peso in early trading, but has turned around to show signs of weakness yet again.
- Keep in mind that we have been in a downtrend for some time, and it does make a certain amount of sense that we would continue to see sellers come in and try to take advantage of “cheap Mexican pesos.”
- Because of this, I think you have got a situation where you need to pay attention to technical analysis and the interest rate differential that has such a major influence on what happens next.
Technical Analysis
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The downtrend line sits just above current pricing and has been resilient for a while. Furthermore, we also have the 50 Day EMA sitting at the 18.52 MXN level, right along with the psychologically and structurally important 18.5 MXN level. In other words, there are a lot of things to chew through to break to the upside, and with that being said, the market is likely to continue to see a lot of selling pressure.
All things being equal, this is a market where you get paid to hang on to this trade to the short side, as the Mexican peso has a higher interest rate attached to it than the US dollar, so it makes quite a bit of sense that traders will continue to favor the downside, perhaps trying to push the US dollar down to the 18.20 MXN level. Anything below there opens up the floodgates to get to the 18 MXN level, which of course is a large, round, psychologically significant figure.
On the other hand, if we were to break above the 18.55 MXN level, then you could have a move toward the 18.80 MXN level, maybe even the 200 Day EMA sitting at the 19 MXN level. Ultimately, I don’t think that happens but it is something to keep in the back of your mind. In general, I think you have a situation where you will see a “fade the rally” type of scenario.
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