The US dollar is still in consolidation overall, as we are looking like a market that is trying to determine where to go next. The background currently looks as if we are trying to determine whether or not we are “risk on” or “risk off.”
USD/MXN
The US dollar is trying to hang on to the same consolidation area that it has been in against the Mexican peso for some time. That being said, we had recently seen a higher high, so we have to ask questions as to whether or not the overall sideways trend can continue. The market, of course, will continue to pay close attention to the interest rates coming out of both the United States and Mexico, as the differential has been a bit wide, although that is trying to tighten up.
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The US dollar, sitting right at the 50-day EMA and at one point in time breaking above the crucial 17.60 level against the Mexican peso, certainly looked like it had tried to break out, but it's given that back. So, the question now is, does this recent swing high make things even more interesting here, or do we continue with the sideways consolidation that swing traders can take advantage of? It is a little bit different at this point due to the uncertainty coming out of Mexico.
Interest Rate Differentials and Central Bank Policy Shifts
The market behavior has been very pro-US dollar in general, but this is one place where it's been a little bit different, mainly due to the interest rate differential favoring Mexico so significantly. That being said, the Central Bank of Mexico has given up the idea of tightening monetary policy, and it is starting to look in the other direction. That could change the dynamic here, but keep in mind, we typically see traders short this pair when things are good in the United States, and as far as risk appetite is concerned, and buy it when things get scary.
Consensus is Still Bearish
The consensus right now is that eventually the Mexican peso should strengthen quite a bit against the US dollar, but I'm not entirely convinced about that. I think the 17 Mexican peso level continues to be a major floor in the market, and I think a lot of people will be watching that closely. If we were to break down below there, it could open up a move down to the 16.50 Mexican peso level, but I think that would take some type of change in fundamentals, and right now, I just don't see that.
The alternative scenario is that we make a fresh new swing high. In other words, we break above the 17.70 level. If we do that, then I think you could have the beginning of a turnaround, and this pair could continue to go higher. I think it takes a lot of effort to make that happen. In fact, I think it takes a fundamental shift in the overall outlook for the global economy, as Mexico sends so many exports into the United States. Remember, Mexico is the largest exporter to the US, and will continue to benefit from any US demand.
In general, this is a market that I think you're watching at a couple of levels. The aforementioned 17.70 level to the upside and the 17.20 level to the downside. If we break down below the 17 Mexican peso level, then that would change a lot of things, but right now it looks very much like a market that's in a state of flux. Short-term range-bound trading remains likely based on the confusion.
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