- Looking at a USD/MXN chart, the first thing that probably comes to your mind is just how important the 21 MXN level is.
- It makes a certain amount of sense, as it has been a historically important level.
- It looks at this point in time as if the USD/MXN pair is just simply consolidating between the 20 MXN level on the bottom, and the 21 MXN level in the top.
The Mexican peso strengthening during the trading session against the US dollar is a bit impressive, due to the fact that the US dollar is breaking most other things apart. All one has to do is look at the Euro, British pound, Canadian dollar, etc., and understand that the US dollar is extraordinarily strong. As the US dollar rallied against almost everything else, the 21 MXN level has stood firm, which is a good sign for the peso. However, I think this is short-lived and we need to look at this through the prism of the bigger picture.
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Mexican Economy, Mexican Border, and Donald Trump
The Mexican economy has been rather sluggish during the year, and the fact that the US economy is strengthening would typically be good for Mexico, but right now this puts Mexico in a bit of a conundrum. They have to negotiate with Donald Trump, which is almost certainly going to demand the border get shut down, at least from an illegal immigration standpoint. This has been a bone of contention between the United States and Mexico, and when pressed and serious about it, the Americans can destroy the Mexican economy rather rapidly. This is part of what you been seeing this year as the political landscape between the United States and Mexico is rapidly evolving, and now that Donald Trump has been elected, it’ll be interesting to see him this plays out.
I do believe at this point in time the market is still pretty much in a “wait and see mode”, as what Donald Trump says and what he does are not necessarily the same thing. He may not be as harsh on the Mexicans as feared, which could lead to a little bit of a relief rally, assuming that the Mexican economy can turn things around as it has been fairly weak most of the year. Furthermore, Moody’s has downgraded Mexico’s government debt outlook from stable to negative, which is something that currency traders pay close attention to.
As things stand right now, it’s very likely that any pullback at this point in time will attract buyers, especially the closer we get to the 20 MXN level, which I think in the short term is going to end up being your floor in the USD/MXN market. A move above the 21 MXN level on a daily close could kick off another round of Mexican peso weakness.
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