USD/MXN jumps to 20.50 as Mexican peso euphoria evaporates

The US dollar rose against most emerging market currencies on Tuesday amid a sharp slide in equity prices in Wall Street and lower US yields. The Mexican peso was among the worst performers as it continues to be under pressure amid worries about President Lopez Obrador policies. 

The USD/MXN yesterday bottomed at 20.00, the lowest in three weeks but then rebounded sharply. From Monday's low, the pair gained more than 2.50% making a dramatic reversal, changing agian the short-term outlook. 

The rally of the Mexican peso at the beginning of the week followed the plan to bay back part of the debt issued for the construction of the new international airport (expected to be canceled by the new administration) and also AMLO inaugural address. The positive tone didn't last much and the peso seems back under pressure. 

The pair started to rally yesterday during the American session and today peaked at 20.52, moving closer to November highs. It is trading at 20.51, consolidating daily gains. From a technical perspective, a close significantly above 20.50 could point to further gains over the next sessions. The next targes might lie at 20.62 (November intraday high) and above resistance is seen at 20.65/70. If it reverses and falls under 20.50, it could continue to move in the consolidation mode around 20.30. 

MXN: Not a positive outlook 

“The peso is likely to remain under devaluation pressure for the time being since there is a lot of uncertainty about the political future of the country. Even before the vote in July, a possible election of Lopez Obrador as president was viewed sceptically by the market. Now it seems that this skepticism was justified, and it looks rather as if hopes were premature after the first conciliatory tones of Lopez Obrador. But we don't want to sound too pessimistic. While the leftwing populist views of Lopez Obrador will certainly be noticeable in his political decisions we don't believe it will come to a very significant change regarding the political course of the country”, wrote You-Na Park analyst at Commerzbank. 

They see the peso under pressure for the time being. “In the course of next year, the market will probably have become accustomed to the new president's style, and it will increasingly become apparent that the shift to the left will be moderate. Against the backdrop of a
credible central bank and high interest rates, the peso should then recover somewhat.”