USD/MXN keeps consolidating around 18.80 despite the recovery of EM currencies

The Mexican peso recovered on Friday, after falling to the lowest in a week against the US dollar and it was about to end the week unchanged despite the rally in many emerging market currencies.

The USD/MXN pair peaked at 18.93, the highest since September 13 and then dropped back to 18.80, where it was trading, slightly below the level it had a week ago. The greenback remained mostly flat against commodity currencies and extended weekly losses versus most emerging markets.

Latin American currencies posted strong weekly gains while the Mexican peso failed to benefit. Weeks ago, when the greenback soared versus those currencies, MXN showed resilience. During the last session, they rallied but the peso also remained decoupled.

The USD/MXN continues to consolidate between 18.70 and 18.90, after the slide from 19.67 (Sep 5 high). The short-term trend points sideways with a modest bearish bias. The main drivers for the week ahead are likely to be trade talks between Mexico, US and Canada, sentiment toward EM and the Federal Reserve meeting (the following week will be the turn of Banxico).

“We expect the pair to primarily trade in the 18-19 region over the course of the coming months. We suspect a NAFTA deal is unlikely in the coming weeks but headline noise could lead to a rise in USD/MXN vols as could the US midterms in November, particularly if a NAFTA deal has not been solidified by that juncture”, wrote analysts at Rabobank. They see the MXN likely to continue outperforming most EM currencies in the coming months.

USD/MXN Levels to watch

The current consolidation phase is likely to continue as longs as it remains within 18.70 and 18.90. A close above 19.05 could signal more gains ahead with a target at 19.15; on top, the next strong resistance is seen around 19.40. On the flip side, a close below 18.70 is needed to open the doors for a slide to 18.50. The key support is the barrier at 18.40/50.