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USD/MXN Balances on Support as Covid-19 Cases Surge in Mexico

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USD/MXNFundamental Forecast: Neutral

The Mexican Peso has struggled to keep positive momentum in recent weeks causing USD/MXN to stagnate around the 19.87 mark despite the US Dollar hitting fresh lows.

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The coronavirus continues to make significant advances in Mexico, with more than 13,700 new daily cases reported on Thursday, the highest number since the pandemic first started back in March. This surge seems to be attributed to the many Americans that have fled their country to avoid restrictions or to take a vacation amid the rising number of infections in the US, with beachside regions that have all-inclusive holiday resorts reportedly welcoming more American tourists than ever.

Whilst this has meant a boom for the tourism sector in Mexico, the economic impact of coronavirus will be more severe in the long-run if appropriate measures to stop Covid infections are not properly taken. This may result in Mexico having to implement tougher restrictions in the future, leading to more economic suffering.

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In fact, in the December meeting minutes released yesterday, Banxico warned that economic recovery will be a tough and long path given that consumption and investment continue to show lackluster performance. In fact, given that inflation has kept within its tolerance range – the main reason that kept Mexico’s central bank from lowering rates in the December meeting was the fear of causing a surge in CPI – we may see rates brought down to 4.0% in its February 11th meeting, when a new member will replace relatively hawkish member Javier Guzman.

A robust Peso is also a main reason why the Central Bank may renew its easing cycle in February, given that USD/MXN has pretty much given back the gains sparked by the Covid-19 outbreak back in March.

USD/MXN Daily chart

Mexican Peso Forecast: USD/MXN Balances on Support as Covid-19 Cases Surge in Mexico

Technically, the sideways range seen since the beginning of December shows a lack of bearish support at current levels, where multiple stops could have been triggered. This means the descending trendline is now further away from current prices, making it harder to form a strong bearish view.

That said, the break lower on Wednesday offered a good retest of the important support at 19.87, so if we see a new break below this level then we may expect to see further pullback towards the 19.50 mark. If so, the descending trendline may be in focus again, although we may see heightened resistance from buyers at the 19.14 area.

On the upside, the 50-day simple moving average is offering a good level of resistance just above the 20 handle, and further upside is likely to be limited at the 76.4% Fibonacci (20.18).

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin



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