USDMXN
USDMXN is finally paring some of its gains after its meteoric rise. In February, the currency pair had been trading around 18.4970. Within 16 days, it traded to its record highs at 25.4459. This translates to a 38% appreciation.
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The first and most prominent reason is the coronavirus pandemic. This infection which began in Wuhan, China has now been felt all over the world. It has forced multiple countries to impose lockdowns, caused disruptions across business sectors, and is threatening to push the global economy into recession. Consequently, the dollar’s safe haven status which is backed by US Treasuries, has attracted bids from investors amid the uncertainty.
Also adding fuel to the rally in USDMXN is the sharp drop in crude oil prices. The commodity is one of Mexico’s biggest exports. Therefore, the fall in the commodity’s price translates to a lesser income for the country too. While the coronavirus has also impacted the decline in crude oil prices, another significant reason for its fall was the breakdown of OPEC+. This happened when Saudi Arabia declared an oil price war against Russia as the latter rejected calls for production cuts.
Because the underlying factors for the rise in USDMXN are still there (that is, there’s no vaccine for the coronavirus yet and there is still an oil price war), I am more inclined to say that what we’re seeing is a pullback. Recently, this has been driven by dollar weakness caused by the Fed’s open-ended Quantitative Easing program.
On the 1-hour chart, it can be seen that USDMXN has formed a head and shoulders pattern. This is considered as a bearish reversal signal which could hint at downside potential for the currency pair. It has already broken through neckline support at 21.6140. Where will it head to next?The 4-hour time frame provides more clues. USDMXN has already broken trend line support at 24.7206 (from connecting the lows of March 16, March 20, and March 25). This means that the next floor could be at 23.6101 which coincides with a longer-term trend line (from connecting the lows of March 4, March 10, March 13, and March 16). If support at this price does not hold, the next floor could be around the 100 SMA at 22.0531.
On the other hand, if there are enough buyers to push USDMXN back up to its recent high at 25.2147, the head and shoulders could be invalidated. This could mean that the currency pair may have enough momentum to retest its record-highs at 25.4375.