The Mexican peso saw extended declines as Banco de Mexico expects slower growth than previously forecasted for the first quarter. While citing risks for the economy, central bank policy makers will keep the benchmark rate at 3.5 percent, a record low. The decision followed poor data showing that retail sales dropped 1.7 percent in February, year-over-year. “The data on sales and everything is not looking good enough to show that we are on the verge of a good run,” said Pedro Tuesta, an economist for 4Cast Ltd.
The peso was down broadly, and the USDMXN is setting up for a bullish breakout even as traders dump the greenback as risk assets fall. There is a large divergence of +/- DMI that indicates bullish price action. The ADX is below 15, but it is beginning to slope upward. If it can reach 20, there could be an increased surge in momentum favoring the dollar over the Mexican peso.
The RSI went almost parabolic this week, as it tracks the price action. Price action is on the verge of breaking out from the downtrend created from the downward movement after making a new yearly high at 13.6023. There is price action resistance just above the downward trend line at 13.14856, but a close above this level could send the exchange rate over 13.2.
A pullback to dynamic support at the 20 and 200 EMAs are possible prior to testing the current uptrend.
The yen has revisited as the go-to safe-haven as Russian-Ukraine tensions flair with Ukraine given Russian an ultimatum: explain military drills at the Ukraine border, or the country will fight pro-Russian separatists. Robert Lynch, a FX strategist at HSBC Holdings, said “against a backdrop of limited, new fundamental drivers, the Ukraine-Russia situation has received more focus.”
Lynch foresees this as a “limited” period of risk aversion, but the risk assets are getting slaughtered. The spike in the yen is driving the MXNJPY lower, and the trend will likely continue. The MXNJPY is almost the inverse of the USDMXN, and traders should treat it as such. Price action broke a minor ranging uptrend, and close below the trend line. The +/- DMI divergence is supporting negative sentiment, while the ADX is ticking upwards.
Support below the trend can be seen at 7.7337, but the pair should continue to trend to the 200 EMA. Russian President Vladimir Putin is highly unlikely to ease back as long as the Russian populous still stands behind him. Increased warnings from the United States and the European Union only seem to agitate the former-KGB agent.
If the 200 EMA breaks, secondary price action support can be found at 7.6172. Aside from the risk aversion, the yen has looked increasingly bullish given last week’s Tokyo inflation data. After jumping 1.7 percent month-over-month to 2.7 percent, it is unlikely the Bank of Japan (BoJ) will indulge into another round of stimulus anytime soon.
Resistance levels can be found at 7.8441 and 7.9172.