Mexican Peso Outlook: Growing Delta-Variant Fears Could Propel USD/MXN Higher

USD/MXN KEY POINTS:

• The Mexican peso has largely traded with a positive bias against the U.S. dollar since July 21, but mounting COVID-19 risks could sour market mood and weigh on EMFX
• Rising cases of the coronavirus delta variant around the world suggest the situation could get worse before it gets better
• In this article we discuss the main technical levels in play for USD/MXN

Mexican Peso Weekly Forecast: USD/MXN Back Within Key Range as USD Flops

The Mexican peso has largely traded with a positive bias against the U.S. dollar since July 21, as shown on the daily chart below. During this time period, USD/MXN has dropped from the 20.20 area towards the 19.90 mark, a 1.5% retracement in less than two weeks.

Falling US Treasury yields and monetary policy divergence between Banxico and the Federal Reserve, at a time when the economic recovery is gaining traction in Mexico, have been MXN’s main bullish drivers. While the backdrop remains somewhat constructive over the medium term, there is a major threat looming over EMFX and risk assets: the COVID-19 delta-variant.

Recently, several countries such as Australia, Japan, the Philippines and now China have re-imposed partial or total lockdowns to curb the spread of the more contagious strain of the virus. With community transmission increasing in the U.S. and other regions, investors believe it is only a matter of time before more containment measures are implemented worldwide. The threat of further lockdowns or other counter-epidemic measures, justified or not, could soon begin to dent risk appetite, boosting safe haven assets.

In times of economic uncertainty and heightened public health concerns, volatility tends to rise sharply in tandem with demand for US dollars. This situation can drive USD/MXN higher as traders brace for trouble and reduce EMFX exposure.

From a technical standpoint, USD/MXN is currently probing support in the 19.85 area, a floor defined by a short-term bullish trendline in play since early June. If price manages to sink below this zone decisively, sellers could aim towards 19.65. A clear break here may see the next support at the 19.00 psychological mark.

Alternatively, if USD/MXN stages a temporary rebound on risk-off mood, the first resistance comes at 20.20 (200-day moving average). If this technical barrier is overcome, buying momentum could push price towards the 20.75 region, where the June high converges with a long-term bearish trendline.

USD/MXN TECHNICAL CHART

Source: TradingView

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—Written by Diego Colman, DailyFX Market Strategist