The US dollar continues to climb against its southern neighbor, but as the interest rate differential is so wide, I am waiting for “good news” to short.
USD/MXN
The US dollar continues to climb against the Mexican peso as we have been bouncing around in a bit of a channel or parallel channel that traders have been watching very closely. It is worth noting that the 50-day EMA is below and that of course is a positive sign. But the 200-day EMA is towards the top of that channel and that could be a major resistance barrier.
The fact that the market dropped the way it did only to turn around and bounce during what would have been a fairly thin day suggests that we are in fact going to continue to see more of a buy on the dip scenario. The market is very noisy to say the least and the other thing that I would keep in mind is that the interest rate differential most certainly favors the Mexican peso so while the market could rally a bit it probably is somewhat limited.
Interest Rate Differentials and Risk Appetite
This would be a definite trade that would suggest risk appetite destruction. After all, the US dollar is considered to be a safer currency than the Mexican peso and vice versa. So in other words, if we get a good amount of positive news coming from perhaps the Middle East with the idea that maybe the war can de-escalate, then I believe that will be one of the first things that could turn this pair around and have the Mexican peso picking up more investment.
The interest rate differential would also be very enticing as well as traders getting paid to be short of this market. If we were to break down below the 50-day EMA it could open up a drop down to the 17.5 level, possibly even the 17 level. To the upside, the 18.20 level seems to be your short-term ceiling. Again, while I do not like buying this pair, I recognize that if you are patient enough, we could possibly get enough good news that we get a decent signal to start selling.