MEXICAN PESO OUTLOOK:
- USD/MXN trades directionless, oscillating between small gains and losses, near the 20.15 area
- Although risk-appetite appears to be rebounding slightly, market caution due to rising Delta variant COVID-19 cases is holding back the EMFX
- In the very short-term, the Mexican peso will be at the mercy of coronavirus headlines
USD/MXN trades with a neutral bias on Thursday, oscillating between small gains and losses around the 20.15 mark in the absence of relevant catalysts. Although risk appetite appears to be picking up to some extent, as reflected by large gains in US equities on Tuesday and Wednesday, the market environment remains fragile and cautious amid rising Delta variant infection rates. In Mexico, for example, new cases rose by more than 15,000 on Wednesday, the largest increase since late January.
With the delta strain spreading rapidly around the world, EM FX may remain on a defensive footing or trade directionless for a while, as fears of a slowing global economic recovery boost the appeal of safer currencies such as the US dollar, Japanese yen or Swiss franc.
In any case, when the delta variant anxiety dissipates in the coming weeks, as it is likely to do given that the more infectious mutation of the virus is not causing an increase in hospitalizations and deaths in proportion to new cases in countries with high vaccination rates, risk currencies could regain ground against the greenback, especially those with an attractive carry (MXN, BRL, for example).
The aforementioned scenario leaves the Mexican peso in a good position over the medium term, even more so now that Banxico looks set to raise rates again in the second half of the year to contain inflationary pressures (high inflation was confirmed again today by higher-than-expected biweekly core and headline CPI readings). In the shorter-run, however, USD/MXN price action may be choppy or even biased to the upside as negative COVID-19 stories start to dominate the news cycle again.
From a technical point of view, there are no major price action developments to report on, as not much has changed in the last few days. In the daily chart below, we can see that USD/MXN continues to trade between horizontal resistance at 20.20 (200-day SMA) and short-term trendline support, now crossing the 19.85 area. For the currency pair to acquire a strong directional bias, price must move either above resistance or below support. That said, if resistance is breached decisively, USD/MXN could charge higher towards the 20.75 region, where the June high converges with a long-term descending trendline. Alternatively, if price breaks support, selling pressure could strengthen and push the exchange rate towards the 2021 low in the 19.55 zone. Below this floor, the next relevant support in play comes at the 19.00 psychological mark.
USD/MXN TECHNICAL CHART
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—Written by Diego Colman, DailyFX Market Strategist