Fundamental Analysis: Peso Volatile but Holding Gains

Fundamental Analysis: Peso Volatile but Holding Gains

The Mexican peso has been volatile today in the runup to Easter but overall MXN’s recent gains have been maintained. As Mexico takes a holiday until Monday, sentiment on its currency remains good. Concern over growth is lower and oil remains close to 2019 highs.

USDMXN posted gains this morning GMT but is now lower than the Asian open at Mex$18.76. The picture was similar with an upward movement by MXN against the yen to about ¥5.95. More significantly, the euro reached a fresh 18-month low against the peso today. Mex$21.13 is the lowest price for EURMXN since November 2017.

Data, sentiment and oil supporting the peso

MXN is widely considered to be one of the standard bearers for emerging markets. It’s the most widely traded currency in Latin America and - by most measures - the most widely traded emerging currency of all. Yesterday’s industrial data and GDP growth from China then gave significant support to the peso. These releases indicate that fears of slowing growth are probably premature.

Oil has also played a role as a fundamental support for the peso. American light oil has been relatively stable in price over the past few days near the important area of $64. This is not far off 2019’s high of $64.63. Crude oil is an important factor for MXN because of oil’s role in the Mexican economy. Based on data from 2018, Mexico produces about 3% of the world’s daily output of crude.

Recent inflation data from Mexico also appears to support the Banco de Mexico’s intention to hold rates for the time being at the decade high of 8.25%. This means that selling even USDMXN yields a significant carry, a factor now in main view again among many traders as risk appetite improves.

Quiet over Easter although traders watch oil

The peso is unlikely to find much direction until Mexican markets reopen on Monday. However, traders are still likely to consider movements by crude tomorrow. Tightening supply as well as possible higher demand in China are factors to be studied.

Events in emerging markets active over Easter might also be important for the peso into next week. Losses for other high yield currencies like the lira could drive more demand for MXN.

Further gains favorable for MXN

Fundamentals in general suggest that the peso might continue its upward movement in most of its pairs. This is mostly supported by the technical picture at present, with overbought conditions yet to appear on most timeframes. Nonetheless, traders should be cautious over the long weekend for Easter due to lower liquidity and the likelihood of ongoing high volatility.

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