Mexican peso halts recovery after three days in a row

• Mexican peso softens on Monday after three days in a row.
• Increasing chances of deeper interest rate cuts and the prospect of slowing growth have weakened the peso’s peers.

The daily chart of USD/MXN depicts a three-day downtrend, a pattern called “Three Black Ravens”.

The Mexican peso (MXN) is trading flat against its key peers in early trading on Monday, after a week in which the peso rallied strongly, gaining about 3.9% on average against the US dollar (USD), euro (EUR) and pound sterling. Pounds Sterling (GBP).

Much higher odds of the US Federal Reserve (Fed) cutting interest rates by 0.50% above benchmark at their meeting on Wednesday drove the Mexican currency higher against the USD last week.

From probabilities of only about 15% mid-week following the release of the August US consumer price index (CPI), market-based odds of a 0.50% Fed cut have now risen to about 59%, according to the CME FedWatch tool. .

A further cut in key US interest rates would widen the already wide interest rate gap with Mexico, where Bank of Mexico (Banxico) rates are 10.75% versus 5.25%-5.50% of Fed. This encourages capital flows in Mexican pesos as they can earn more interest.

Overall, weak expectations about the economic outlook for the United Kingdom (UK) and the Eurozone led to MXN gains against the EUR and GBP. Weak UK GDP growth data and a downward revision to GDP forecasts by the European Central Bank (ECB) acted as catalysts.

Mexican peso recovers as political risk stabilizes

The Mexican peso could gain a boost from evidence of a less negative assessment of its political outlook.

The currency lost more than 10% in June following a general election in which the leftist Morena coalition won a supermajority. Investors feared the impact of reforms the party wanted to make affecting the judiciary and industry regulators, which they argued risked reducing foreign investment in the country.

Ratings agency Moody’s has warned of a potential downgrade from the reforms, and major investment banks such as Morgan Stanley and Bank of America have also expressed concerns.

The first tranche of reforms was passed by the Mexican Senate last week and is on track to become part of the constitution, and while the news caused some volatility for the Peso, markets have since settled.

Ratings agency Fitch presented a more neutral, though still slightly negative, view on the country’s creditworthiness in a recent note, FXStreet analyst Christian Borjon Valencia reported on Friday.

“The rating outlook is stable, which means we see a balance between strengths and weaknesses. Before we see an outright downgrade of the sovereign rating, what could be expected from us is a change in outlook, either from stable to positive or from stable to negative, the latter likely to occur.” said Gerardo Carrillo, Regional Director for LATAM at Fitch. Evaluations.

In addition, Banxico’s director of economic research, Alejandrina Salcedo, “said a robust rule of law environment can help generate conditions that encourage investment,” and “respect for the rule of law and public safety” would provide a greater safety, would stimulate flow. of investments in all regions and contribute to capitalizing on the opportunities offered by the resettlement process'”, writes Borjon Valencia.

At the time of writing, one US dollar (USD) buys 19.22 Mexican pesos, EUR/MXN trades at 21.36 and GBP/MXN at 25.29.

Technical Analysis: USD/MXN Prints Three Black Ravens

USD/MXN broke out of a rising mini-channel into a wider rising channel and has declined for three days in a row. This has now formed a Japanese Three Black Crows candlestick pattern on the daily chart (shaded rectangle), which indicates that prices are likely to drop further lower in the near term.

USD/MXN Daily Chart

Odds now favor the pair to decline to the next bearish support level at 19.01 (23 August low), likely followed by further weakness to the 50-day simple moving average (SMA) at 18.94 and the lower trend line of channel larger than a few pee. below. At that level, the price will likely find firm support to stabilize and possibly recover.

Even though the short-term trend is bearish, the medium and long-term trends are still bullish, suggesting the possibility that the pair will eventually recover and continue to trade higher.