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USD/MXN Week Ahead: Signals are Mixed, and so is Risk Sentiment

Main USD/MXN Talking Points:

  • Mexico has record new daily coronavirus cases
  • Chinese GDP and EZ recovery fund will be key to gauge sentiment next week
  • USD/MXN gives mixed signals

Mexico has been in the news lately, and not for the best of reasons. Coronavirus is spreading rapidly in Latin America, and Mexico is the second country with the highest death rate, as more than 33,500 people have died in the country since the start of the pandemic, only behind Brazil, who has a total of 69,000 deaths.

But Brazil has a greater population, 85 million more citizens than Mexico to be exact, and given than Brazil has had 1.7 million infections whilst Mexico has reported just 282.000, the death rate in Mexico is much higher. Last Thursday we saw how daily infections had reached a new high in the country, totalling 6,741 new cases, followed by a new record this Wednesday, at 6,995 new cases, and then again on Thursday with 7,280 new infections. Though the full extent of the virus may not be known, the official figures show that things aren´t going in the right direction, and the Mexican Peso is feeling the heat.

Risk sentiment has suffered another set back this past week, as equity markets responded to soaring coronavirus cases worldwide, despite Chinese shares taking on a bullish run, kind of resembling the run up to the 2015 stock market crash. The US Dollar recovered some bid support on Thursday, sending risk-on currency pairs lower, but a slight bullish push returned to finish the week, as positive news about Gilead´s remdesivir testing helped markets nudge higher on Friday.

Looking ahead, traders are likely to stay focused on coronavirus figures to gauge market sentiment, with the US being the main centre of attention for wider risk sentiment. This coming week is a heavy one for the economic calendar, but special focus is likely to be drawn towards China´s GDP 2Q results, as it will be the first country to materialise the impact of the virus on the second quarter, which is expected to have taken the biggest hit. Despite China being two steps ahead of the rest of the world in regards to easing of lockdown measures and economic recovery, any variations from market expectations are likely to provide heightened volatility.

Also of note will be the upcoming talks recording the Eurozone pandemic recovery fund, as both the Netherlands and Austria seem closer to backing the fund, given that it comes with conditions. No data is released next week for Mexico, so the Mexican Peso is likely to move in line with broader risk sentiment.

USD/MXN 4-hour chart (7 May – 10 July 2020)

USDMXN Price Chart

From a technical standpoint, USD/MXN seems to be stuck between two key Fibonacci levels. It has been like this for some time, with most of the last 4 weeks somewhere between 23.02 (38.2% Fib) and 22.17 (50% Fib). Despite it being a wider range, which allows for some trading opportunities, the pair doesn´t look to be breaking the boundaries any time soon. If we look at momentum indicators, the signal is pretty mixed, with moving averages that are not properly placed in descending or ascending order, and a recent small bull cross of the 20-DMA above the 50-DMA. The MACD is hovering around the 0 mark and the stochastic is retreating back down towards the lower end of 60.

If upside momentum is regained, as could be the case given the 50-DMA is acting as a stable support around 22.56, the next objective will be to break above the weekly high of 22.89, in a new attempt to break the upper limit of the trading range. If that is the case, traders will be watching for a break above 23.22 to confirm that buyers are again in control, as this was the area where the uptrend was halted at the end of June.

To the downside, immediate support can be found on Thursday´s low of 22.54, followed by 22.45 and the weekly low which tested the lower boundary of the range at 22.15.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin