- The Mexican Peso sees a slight recovery as risk-on sentiment boosts emerging market currencies.
- Potential carry trade inflows, spurred by a weaker Japanese Yen and diminished domestic political risk, also lend support to the Peso.
- USD/MXN is currently developing a bullish 'abc' pattern formation.
The Mexican Peso (MXN) edges up on Tuesday, gaining around a quarter of a percent against major currency pairs. A positive risk appetite from Monday’s U.S. session, which buoyed the S&P 500, may be lifting the Peso, as emerging market currencies typically benefit in such conditions.
Revived carry trade inflows could also be supporting the Peso. This strategy involves borrowing in low-interest currencies like the Japanese Yen (JPY) to invest in high-yielding ones like the Peso.
Given Japan’s weekend election results, which saw the ruling Liberal Democratic Party (LDP) lose its stronghold, further rate hikes are unlikely, weakening the Yen and making the Peso more attractive for carry traders.
Political dynamics in Mexico also play a role
Mexican Supreme Court Judge Juan Luis González Alcántara Carrancá has recently opposed the Sheinbaum administration’s judicial reforms, arguing the unconstitutionality of “Evaluation Committees” used for judge elections. The Peso took a significant hit post-June elections, as Sheinbaum’s Morena coalition gained a supermajority, sparking concerns over potential reforms deemed unfriendly by Western investors.
The Peso faces a busy week on the data front, with Mexican preliminary Q3 GDP and the Fiscal Balance report due on Wednesday, followed by the Jobless Rate on Friday. The IMF recently downgraded Mexico’s 2024 growth outlook to 1.5%, and weaker Q3 GDP data could weigh on the Peso if it aligns with this pessimistic forecast.
Technical Analysis: USD/MXN Extending a Bullish Move
USD/MXN appears to be unfolding an upward “c wave” in a bullish “abc” pattern, which began from the October 14 low. The pair is targeting the Fibonacci 61.8% level of wave “a,” likely reaching 20.29 if it clears the wave “b” high at 20.09.
USD/MXN Daily Chart
USD/MXN appears to be in an established uptrend across short, medium, and long-term frames, holding steady within a rising channel. Following the principle that "the trend is your friend," this setup supports a likely continuation to the upside.
The pair's recent break above the October 1 high of 19.83 has solidified a bullish outlook, with an initial target near the September 10 high around 20.13.
