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USD/MXN Week Ahead: Sentiment Will Focus on Sino-US Tensions Ahead of Banxico Meeting

Main USD/MXN Talking Points:

  • The US puts Mexico on the travel ban list
  • Coronavirus cases continue out of control in Latin America
  • Banxico will publish its monetary decision on Thursday as the government struggles for funding

With another week gone past we are now at the heart of August and what seems to be a typically quiet month is proving to have some excitement to it. At the centre of the volatility is coronavirus news, as highly expected, but other factors are also playing their part.

Most notably, Donald Trump has been on another one of his “national security” rampages, causing political and commercial discontent in a time when tensions are already high. On Thursday he decided to add WeChat parent company Tencent to the list of companies banned from doing business with US consumers, a list that already included ByteDance, the parent company to worldwide famous social network TikTok, where millions of Americans make money every day. His reasons for this are based on the belief that both companies are used to distribute propaganda about the Chinese Communist Party, as well as using consumer data to their benefit.

As if that wasn’t enough, and given expected retaliatory action from Beijing, Trump has also decided to re-impose 10% tariffs on Canadian aluminium. Again, he has defended this action on the grounds of national security, as he believes Canadian exporters are filling the US market with cheaper grade materials. This move undermines the relationship built on the newly-agreed USCMA trade cooperation agreement.

But Canada isn’t the only country in the old NAFTA group that has been in the US’ radar this week, as it was announced on Thursday that Mexico has been added to the travel ban list, on the basis of a rapid spread of coronavirus, which has been aggravated by surging numbers in crime. Although it is not an unexpected move given the nation’s inability to control the spread of the virus, this puts Mexico on par with war-torn nations, something which is highly detrimental to its economy.

Given that Mexico is highly export-driven, reputational costs are an important part of the matrix. Although this shouldn’t stop consumer interaction with Mexican products, it is an important factor to take in to account given that economic recovery is likely to be driven by consumer demand, a big part of which comes from the US.

Looking ahead, next week proves to be another quiet one on the data front, but Thursday will see Banxico´s interest rate decision. Rates have been decreased by 325 basis points since July 2019, from 8.25% to the current 5%, but the central bank could be sceptical of another rate cut, as this would undermine its carry trade value, although that might be the least of their worries at present.

Many times Mexican policymakers have stated that Mexico does not have the capital to fund the infrastructure needed to reactivate the economy, and local sources are now stating that Banxico could give the government a substantial amount of money to help aid the economy after the impact of the virus, something that could ease the pressure off the Mexican economy and therefore its exchange rate.

This is on the basis that international reserves are in dollars, but they are accounted for in pesos, so this year Banxico will almost certainly have foreign exchange gains, known as operating remnants. The actual figure is uncertain as the exchange rate for the end of the year is unknown, but calculated at current levels, this could be around 500 billion pesos.

USD/MXN 4-hour chart (10 June – 07 August 2020)

USDMXN Price Chart

From a technical standpoint, USD/MXN managed to break above the downward resistance line (orange) created from joining the highs from the 1st of July. This line has now become somewhat of an area of support as it suffered another downward correction early on Wednesday. The pair has also managed to break above the downward resistance from the peaks in March (blue) as risk has now turned to the upside.

A lot depends now on risk sentiment and investors’ willingness to hold on to cyclical assets. As the Dollar has hit two year low, haven demand seems to have picked up slightly, which supports the upside correction in USD/MXN, which could face some resistance around the 22.90. On the downside, the pair could find further support at 22.33, before pulling back towards 21.84.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin