The Mexican peso could turn from a leader to an outsider in Forex. All bearish drivers have already been priced in the USDMXN. Let us discuss the Forex outlook and make up a trading plan.

Weekly Mexican peso fundamental forecast

Due to the pandemic and war in Ukraine, seismic shifts are taking place in the global economic system. There is a redirection of flows of raw materials, capital, and human resources, which affects various countries and their economies. The new trend is deglobalization, and it started with trade wars between the US and China. The faster this or that state adapts to innovations, the more benefit will be for its currency. A typical example is the Mexican peso, which in 2022 appreciated against the US dollar by more than 5% and became one of the strongest currencies of the year.

With lower wages than in China, an established manufacturing sector, and proximity to the United States, Mexico is reaping the benefits of deglobalization. Deliveries of its manufactured goods to the United States in January-October increased by 60% compared to the period before the pandemic. It is curious that the country increased exports in such low-tech areas as plastics and textiles while China reduced its exports in the same sectors.

Dynamics of US imports from Mexico and China


Source: Wall Street Journal.

Improving foreign trade, aggressive tightening of monetary policy by the Bank of Mexico, and growing demand for carry trades involving the peso were the main bearish drivers for the USDMXN decline in 2022. In 2023, the situation could radically change.

The Central Bank began to raise the main interest rate before the Fed, from June 2021, and by the end of last year, brought it to a record 10.5%. At the same time, there are more and more signals in recent meetings that the cycle of monetary tightening is coming to an end. Even despite the acceleration of inflation in Mexico from 7.46% in the second half of November to 7.77% in the first half of December. If the regulator stops raising the rate and the Fed pushes it up to 5.1%, and possibly 5.4%, as Minneapolis Fed President Neel Kashkari suggests, monetary policy divergence will support the USDMXN growth.

Dynamics of Mexican inflation


Source: Bloomberg.

Mexico also has problems with foreign trade. The conflict between Mexico, the US, and Canada, provoked by the energy policy of Andrés Manuel López Obrador, is fraught with disruption of economic ties, which will negatively affect the peso. Traders of the Chicago Mercantile Exchange, whose activity is considered an indicator of market sentiment, bet on the weakening of the Mexican currency.

Weekly USDMXN trading plan

I suppose the resilience of the US economy and keeping US inflation at elevated levels will restore the demand for the greenback, which will be a better tailwind for the USDMXN than the end of the Bank of Mexico monetary tightening cycle or the Mexico City-Washington-Ottawa trade dispute. Of course, this cannot go on indefinitely. Over time, the situation in the USA will worsen, and prices will fall, which will encourage the USDMXN bears. In the meantime, it makes sense to buy the pair when the price breaks out the resistances at 19.43 and 19.5.

Price chart of USDMXN in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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