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The Mexican peso strengthened against the greenback during the trading session on Friday, as the USD/MXN pair broke below the 20.25 level. The 20 level is next, and it is offering quite a bit of support. The market breaking below the 20 level would kick off a lot of selling for the greenback, which could make a bit of sense as the interest rate differential here is one of the few places where we might see the US dollar suffer a bit in that scenario.
The Mexican peso is also sensitive to the crude oil market, which has had a nice run higher during the day. Ultimately, that could be a reason for Mexico to continue to attract inflow, but from a technical analysis standpoint, it is likely that we are going to continue to see a lot of back and forth and choppy behavior, something that is very common for this pair. After all, over the last couple of weeks, we have banged around between the 20 and the 20.50 levels, while the 50 Day EMA is grinding sideways. The 200 Day EMA is also going sideways and offering dynamic resistance.
Looking at the chart, you can see that this pair does tend to be very noisy so be very patient if you are going to be trading it. The market is likely to continue to see a lot of movement based upon the central bank differentials, as although the Federal Reserve is very hawkish at the moment, it is likely that we will continue to see higher interest rates in Mexico attract a certain amount of inflow as well. Furthermore, you need to keep an eye on risk appetite, due to the fact that the Mexican peso is correlated to Latin America, which of course is an area where people might throw money at if they feel like taking a bit of risk.
The alternate scenario of course could work out if there is a sudden “risk-off” type of attitude, which has people looking to get into the US dollar. The US dollar being a safety currency is something you should never forget about because it does make quite a bit of sense that money would go flowing into the US bond market if we do have a sudden shock to the system.
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