Mexican peso starts the week recovering against the US dollar

  • The Mexican peso recovers the levels reached before Trump launched its tariff threats.
  • The MXN should lead the advances of emerging currencies this week in a context of lower risk aversion.
  • Mexico will seek the ratification of its legislators in the new immigration and security agreement with United States.

MXN starts week positively

The Mexican peso starts the week with strong profits and a new face after the governments of Donald Trump and Andrés Manuel López Obrador reached an agreement on the immigration issue on Friday night. The relaxation of the disputes between both nations avoids the implementation of a tariff rate of 5% on Mexican products and increases the likelihood that the T-MEC treaty (USMCA) will be ratified by the corresponding legislators.  In this context, the USD/MXN started the week with a fall of 2% and traded at 19.24, levels not seen since May 30.

As part of the signed truce, Mexico will have to increase the presence of its National Guard on the border with Guatemala, while the immigration and security treaty will have to be ratified by the Mexican Congress. We can not rule out that any kind of delay on this front would result in additional risks to the Mexican economy and perhaps new commercial threats.

In any case, in the coming days, the greater appetite for risk assets motivated by the relaxation of commercial hostilities could boost emerging assets and create a more benign environment for the Mexican currency.

With the latest movements, the MXN has returned to positive territory against the dollar so far in 2019. While there is room for the USD/MXN exchange rate to continue falling in the short term, over a long term horizon, the peso Mexican maintains a negative bias. The low economic growth, the cooling of the investment, the increase of the fiscal burden and the deterioration of the credit profile of the country generate an unfavorable environment for the largest Latin American currency, even if the Fed cut its interest rate soon.

Technical analysis of the Mexican peso

Upon leaving the overbought zone, the USD/MXN demonstrates that there is a selling force bytesting the bull trend line of19.1502 (S1). This ascending line extends from the annual minimum registered on April 19. A break below this support, which has been respected by the price of the pair during the last month, would free the way to attack the psychological threshold region of 19.00 (S2).
Should the exchange rate rise, the USD / MXN would slow down in the area of the February high above 19.4713 (R1), where the 200-period moving average also converges. Only a strong boost above this resistance would facilitate the recovery of the March maximum at 19.6332.

The euro loses strength and puts the 1.13 level at risk.

  • The euro starts the week with moderate falls and retreats to the edge of the psychological level of 1.1300.
  • The falls of the EUR/USD have a technical component, although they are mainly motivated by reports that the European Central Bank would be considering cuts in its interest rate in case economic growth continues to slow down.
  • This week, market attention will focus on Mario Draghi’s speech in Frankfurt and the US inflation data.

The euro starts the week with an unfavorable sign and reverses part of its gains last Friday, in a day without major macroeconomic news. At the time of writing, the EUR/USD retreats around 0.3% and endangers the psychological threshold of 1.1300.

At the moment, the euro currency does not manage to benefit from the positive tone of the markets created by the end of the US tariff threats against Mexico and by some encouraging data from China and Japan.

The euro’s falls appear to be part of a technical corrective, after it soared about half a percentage point on Friday after disappointing NFP figures. However, the main bearish catalyst was a report published by the Reuters news agency on Sunday. According to the article, two sources familiar with the monetary policy discussions of the European Central Bank indicated that the institution would be willing to reduce its interest rate if economic growth and inflation continue to weaken.

The possibility of new stimuli by the ECB, beyond the TLTROs announced a few months ago, creates challenges for the euro and could contain its recovery in the short and medium term.


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