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  • The Mexican peso and Brazilian Real, the worst performers on Monday.
  • USD/MXN rises above 22.50, a critical technical level, clearing the way to more gains.

The USD/MXN pair is trading above the 22.50 area, a key technical level, up for the fifth day in a row. It peaked at 22.63, the highest level in a week and it could post the strongest close since mid-July. A stronger US dollar and technical factors boosted the pair.

The greenback started to recover ground on Friday, and it accelerated on Monday. Among the most affected is the Mexican peso. The USD/MXN gained speed after breaking the 22.45 area. The mentioned zone contains horizontal resistance, the 20 and 55-day moving average and a short-term downtrend. A consolidation above would likely lead to more gains, targeting 22.80/90. If the USD/MXN retreats under 22.50, the bullish momentum will ease. The next support is 22.15/20.

Not even higher equity prices in Wall Street or the rally in crude oil prices (WTI rose above $41) are helping the Mexican peso on Monday. The positive tone regarding US stock is not reflected across emerging markets.

Analysts at CIBC hold a view of a gradual depreciation of the Mexican peso against the US dollar, taking into account the outlook for the local economy. They explain that the combination of deep recession and low inflation provides room for further cuts on the policy rate, thus leading to the continuity of lower carry-trade return.

Regarding the economy, CIBC economists consider the deep recession taking place in Mexico damages tax collection and increases the pressure for more fiscal spending. They see a government response below expectations and highlighted strategy of President Lopez Obrador to increase the role of the state energy sector. “These government strategies damage even more business confidence, thus jeopardizing private investments.”