USD/MXN hits 1-week highs above 20.00 after a sharp reversal

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  • Mexican peso continues to slide against US Dollar. 
  • Federal Reserve keeps rates unchanged as expected; next week is Banxico meeting. 
  • Crude oil tumbles 1.80%, falls to lowest since March, adding more pressure to MXN. 

The Mexican peso dropped sharply against the US Dollar on Thursday. The USD/MXN rose more than 3% from yesterday’s low making a significant reversal that could signal a test of October highs. 

The pair opened the day around 19.85 and it moved all day with a bullish bias. The move to the upside gained momentum during the US sessions. It peaked at 20.21 following the FOMC statement and amid a rally of the US dollar across the board. The greenback also rose sharply on Thursday against other emerging market currencies. The Fed kept rates unchanged as expected and market participants see a rate hike in December and three to four rate hikes in 2019. 

From a technical perspective, the USD/MXN reversed dramatically and it was at 20.15. A daily close on top would expose the next resistance seen at 20.30. If it continues to rise, attention would turn to 20.50. On the flip side, a slide under 19.90 is needed to ease the bullish pressure. 

Inflation slows but maybe not enough 

Data released today showed that inflation eased in October in Mexico but still remains well above the central bank’s target. The Consumer Price Index rose 0.52% in October and 4.9% over the last 12 months (down from 5.02% of the previous month). 

Despite the slowdown in inflation, the Bank of Mexico is still seen raising rates by some analysts. The recent depreciation of the peso and current uncertainties added pressure to Banxico officials to rise the key rate to 8% from the current level of 7.75%. 

IMF on Mexico

In a report, the International Monetary Fund, mentioned that the incoming administration lead by Andres Manuel López Obrador will inherit an economy with very strong fundamentals and policy frameworks that has exhibited resilience in the face of a complex external environment but “still confronts significant challenges—namely to strengthen growth while reducing poverty and inequality—and has yet to win the fight against corruption and crime.”

The IMF expressed that uncertainty associated with the global economic environment and the policies of the incoming administration persists. “Prospects hinge on the steadfast implementation of structural reforms while ensuring continued macroeconomic stability”. It mentioned that the state oil company, Pemex, should strengthen it financial situation as “a prerequisite to contemplating new investments in refining.”
 

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