The popularity of carry trades, expectations of a Fed rate cut, the Bank of Mexico’s cautious approach, and the 90-day tariff delay for Mexico are driving the USDMXN exchange rate lower. How long will bears dominate the market? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
The carry trade is contributing to the decline of the USDMXN.The Bank of Mexico is slowing down the rate cuts.The Fed might undermine risk appetite.The USDMXN pair can be purchased on a breakout of 18.85.
Weekly Fundamental Forecast for Mexican Peso
High global risk appetite and low volatility have turned the market into a paradise for carry traders. Currently, yields on carry trades involving the Japanese yen and the US dollar as funding currencies are skyrocketing. The Mexican peso and Brazilian real are among the preferred currencies. Their central banks are keeping interest rates high. How long will this continue? The answer will come from the US economy and the Fed.
Carry Trade Efficiency
Source: Bloomberg.
After the US concluded trade agreements with various countries, tariff uncertainty disappeared, and volatility decreased. For the Forex market, the indicator plummeted to its lowest level in more than 12 months. Attention has shifted to the Fed’s readiness to ease monetary policy. Investors believe this will happen in September and expect three rounds of monetary expansion by the end of 2025.
A reduction in the federal funds rate is seen as compensation for the global economic slowdown caused by tariffs. Meanwhile, the expectation of a sharp Fed rate cut is weakening the US dollar and increasing the effectiveness of carry trades involving the greenback as a funding currency.
US Dollar Performance and Carry Trade Efficiency
Source: Bloomberg.
Despite its threats against trading partners, the US administration is in no hurry to implement them. Donald Trump said the 50% tariff will not apply to all Brazilian goods. Instead, many of them will be subject to 10% tariffs. Mexico was granted a 90-day delay at the beginning of August.
The USDMXN pair is supported not only by carry trade and reduced trade uncertainty, but also by bears. At its last meeting, the Bank of Mexico surprised investors by cutting its key rate by a smaller amount. Instead of continuing the cycle of 50 basis point cuts, Banxico opted for a 25 basis point cut. The accompanying statement noted that consumer prices were slowing, but core inflation remained high.
Mexico’s Inflation and Key Rate
Source: Bloomberg.
The golden hour for the carry trade cannot last forever. After rallying 30% from April lows, the S&P 500 index looks overbought. This rally is supported by robust corporate earnings and the anticipation of the Fed resuming its monetary expansion cycle. However, the price-to-earnings ratio is the third-highest in history. The two previous instances ended in sell-offs.
Weekly USDMXN Trading Plan
If fear spreads through the US stock market, carry traders will flee the battlefield. Volatility will rise, and the Mexican peso will suffer. This could be triggered by Jerome Powell’s dovish rhetoric in Jackson Hole. It could cause a sell-off in the S&P 500 index after investors buy the rumor and sell the news. USDMXN bears are also in the crosshairs. Therefore, long trades can be opened on a breakout of the resistance level of 18.85.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDMXN in real time mode
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