Mexican peso halts uptrend on carry trade unwinding rumours

• The Mexican peso is stalling in an uptrend on carry trade rumors.
• Mexico retail sales data is scheduled for release on Tuesday.
• Technically, USD/MXN is performing a downward step in an ascending channel.

The Mexican peso (MXN) is lower at the start of the European session on Tuesday as rumors persist that the carry exchange that has so far been favorable to the peso is unraveling.

Interest rates in Mexico are relatively high at 10.75%, which is attracting demand from the carry side – an operation in which traders borrow in a currency with low interest rates such as the Japanese yen (JPY) and use the money to buy with higher interest. currencies such as the Mexican peso. Trading profit is the difference between the interest paid on the loan and the interest earned on the investment, less any currency depreciation.

The buzz on social media seems to be that the carry exchange is unwinding, however, and flows into the Peso are drying up. This has been cited as a factor in the recent appreciation of the Japanese yen. If so, and the influence of commercial shipping is declining, the implications for the Peso will be negative. However, given the still wide interest rate differential between Mexico and Japan, it seems unlikely that the carry swaps will cease entirely.

At the time of writing, one US dollar (USD) buys 18.71 Mexican pesos, EUR/MXN trades at 20.72 and GBP/MXN at 24.30.

Mexican peso: domestic data, geopolitical risks to determine valuation

The Mexican peso could be hit by Mexico’s retail sales data for June – due out at 12:00 GMT on Tuesday – with analysts forecasting a 1.8% year-on-year decline. While not usually a market-moving release, a stronger-than-expected figure could support the peso, lending credence to the view that Banco de Mexico (Banxico) will take a more gradual approach to cutting interest rates than expected in present. Expectations that interest rates could remain high for longer would be positive for the Peso, as high interest rates attract higher foreign capital inflows.

Headline inflation in Mexico remains high at 5.57% and this could be further supported by stubborn housing inflation, according to research by Capital Economics, which expects Banco de Mexico (Banxico) to take a gradual approach to reduce interest rates.

Trump’s risk is shrinking

The steadily declining chance that former President Donald Trump will win the US presidential election in November and impose higher tariffs on imported foreign goods, many of which come from Mexico, is another support for the peso. A recent poll by polling site FiveThirtyEight.com shows Harris leading Trump by two and a half points, according to a report in The Independent.

The peso is sensitive to changes in global risk appetite and could also be affected by a breakdown in Middle East peace talks. US Secretary of State Anthony Blinken is currently trying to negotiate a peace deal between Israel and Hamas, but has been unable to secure the agreement of all parties, according to Reuters. The threat of war escalation and the involvement of Iran would cause an increase in market volatility, which would likely be detrimental to the peso.

Technical analysis: USD/MXN corrective wave C unfolding

USD/MXN is consolidating in a bearish segment of a rising channel. The pair posted a Japanese Shooting Star candlestick pattern on Monday, and if Tuesday ends with a red candle, it will provide further confirmation of the downward leg extension to the lower channel line and 50-day simple moving average (SMA). at 18.42 nearby.

USD/MXN Daily Chart

USD/MXN appears to be playing out in a bearish ABC pattern down its ascending channel. If so, it appears that wave C is currently unfolding and is likely to be of a similar length to wave A or a Fibonacci ratio thereof. This suggests that the downward movement probably still has some work to do.

The overall trend over the medium to long term timeframes is undoubtedly bullish, however, so once completed there is a good chance that the channel will continue to rise as these long term trends extend.