Mexico's Peso Bucks USD Strength

 | Oct 06, 2014 03:07PM ET

After a fairly busy week, global currencies may consolidate some of their recent moves this week. While there are a few potential market-moving announcements from the G10 this week (including the Fed minutes and a BOE meeting), the economic calendar is almost completely devoid of high-impact releases from the emerging markets.

In last week’s EM Rundown , we focused on the potential for more USD strength, especially against the so-called “Fragile Five” currencies with high current account deficits. In particular, both USD/TRY and USD/ZAR extended their uptrends, with the former hitting an 8-month high above 2.30 on Friday and the latter almost tagging its 6-year high before pulling back early in today’s trade.

This week, we wanted to focus in on a pair that has been bucking, or at least mitigating, the broad trend toward US Dollar strength: USD/MXN.

From a fundamental perspective, economic data out of Mexico has been generally strong, perhaps due to its close ties with the strong economy of its northern neighbor. Overall, analysts expect Mexico’s real (after inflation) GDP  to expand by about 2.5% this year and accelerate to about 4.0% in 2015. Over this weekend, the 3rd-party statistics institute INEGI estimated that consumer confidence, producer confidence, and PMI all rose to multi-month highs in September.

Technical View

Unfortunately for peso bulls, the currency’s performance has not been able to match the strong growth in the economy. USD/MXN has generally edged higher over the past few weeks, and the pair is now within striking distance of its 2-year high at 13.60. Meanwhile, the MACD indicator continues to trend higher above “0” and its signal level, while the RSI remains in bullish territory, but not yet overbought, showing a healthy uptrend for now.

Moving forward, the bias is for further modest gains in USD/MXN as long as rates stay above previous-resistance-turned-support at 13.36, though short-term gains may be capped if/when the pair reaches resistance at 13.60. Meanwhile, a break back below 13.36 would show that the currency is finally starting to catch up with the economy’s performance, and could open the door for a move back down toward the 100-day MA near 13.10 in time.