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  • Mexican peso corrects further against US dollar, off monthly highs.
  • Key event ahead: Bank of Mexico meeting on Thursday.

The Mexican peso dropped for the second day in-a-row against the US dollar. Yesterday, following the agreement between the US and Canada, it jumped but finished the day lower and today it mover further to the downside.

The USD/MXN pair bottomed on Monday at 18.49, the lowest level in seven weeks. But quickly rebounded to the upside. The area around 18.50, from where the pair reversed, is a significant support area. The rebound could be attributed to some profit taking after the new NAFTA rally.

On Thursday, the Bank of Mexico meets. Market consensus point to a no change in the key rate, currently at 7.75%. Trade deals, the stabilization of the exchange rate and a modest slowdown last month in the inflation rate, removed pressure out of Banxico for another rate hike. “The resolution of the NAFTA impasse should provide the Mexican central bank (Banxico) the final green-light needed to decouple its monetary policy decisions from the US Fed. A “hawkish hold” is much more likely than an “all-clear” signal for rate cuts, but we see a greater a risk of a dovish repricing of the yield curve,” say analysts at ING.

USD/MXN Levels to watch

The short-term outlook is unclear. Until yesterday the bias was bearish but the strong reversal from 18.50 could point to some stabilization ahead, probably between 18.65 and 18.90. A close below 18.65 would clear the way for another test of the strong support seen at the 18.45/50 zone. Below the next key level is an uptrend line that stands at 18.20. On the upside, a daily close above the 21-day moving average at 18.95/19.00, could signal a test of 19.15. Above the next resistance is seen at 19.30.