USD/MXN breaks below 19.00, hits lowest level in two weeks

• Mexican peso up in the market on higher crude oil prices. 
• USD/MXN down for the fourth-day in-a-row, posts lowest close since March 20. 

The Mexican peso rose sharply against the US dollar breaking key levels. On the back of a weaker greenback across the board, the Mexican peso benefits from a rally in crude oil prices. 

The USD/MXN broke below 19.00 and bottomed at 18.90, the lowest level in two weeks. From the lows bounced to the upside and as of writing was trading at 18.97. The pair so far is consolidating below 18.98, pointing to further losses in the short-term. The next support level is seen at 18.85, followed by 18.70/75. A rebound clearly back above, 19.15 (20-day moving average) could negate the current negative bias suggesting more range-trading. 

Today, the WTI barrel rose 2%, reaching the strongest level since early November above $64.00. The US dollar lost ground against emerging market currencies and also versus majors. The US Dollar Index fell 0.25% and it was hovering slightly above 97.00. 

Key events ahead include in Mexico CPI data tomorrow and Banxico minutes on Thursday while in the US inflation data and FOMC minutes are due on Wednesday. 

Medium term outlook 

“USD-MXN has been moving more or less sideways since the beginning of the year. External factors and domestic risks balance each other out. The external factors are providing a friendly environment for EM currencies. In particular, the prospect that the Fed is at the end of its rate hike cycle and may even cut rates next year supports EM currencies. However, due to economic and political risks, the Mexican peso can only benefit to a limited extent. Should sentiment become less favourable for EM currencies, which is quite possible due to global economic and trading risks, domestic risks should gain the upper hand and put the peso under downward pressure”, mentioned analysts at Commerzbank. 

According to them, weak growth, domestic political risks and growing concerns about the financial situation of Pemex and thus about a possible deterioration in public finances are likely to weigh on the peso in the coming months. “We do not expect an excessive depreciation as long as there is no external shock. Additionally, the negotiated USMCA deal should be ratified by the respective parliaments this year, which would remove a major uncertainty factor from last year.”

They consider that the market should have become more accustomed to the Mexican President López Obrador style, and it should become increasingly apparent that the shift to the left will be moderate. “Against the backdrop of a credible central bank and high interest rates, the peso is then expected to recover somewhat.”