Mexican Peso Traders Prepare for Data Day

• The Mexican peso is trading flat awaiting economic data to be published on Thursday.
• The MXN suffered a reversal on Tuesday that could reflect a change in sentiment.
• A broad shift in global interest rate expectations is supporting currencies.

The Mexican Peso (MXN) is trading mostly flat across its key pairs on Wednesday, stabilizing after Tuesday's sudden depreciation that was likely due to a widespread shift in global interest rate expectations.

The change in outlook could reduce the advantage gap enjoyed by the Peso due to Mexico's relatively high interest rates (11.00%), which are an attraction for carry trade operators.

Mexican Peso traders are now preparing for Thursday's “Data Day,” when a series of figures will be released to update them on the health of the country's economy.

At the time of writing, USD/MXN is trading at 16.60, EUR/MXN at 18.04 and GBP/MXN at 21.18.

The Mexican peso suddenly depreciates in the main pairs

The sudden depreciation of the Mexican peso on Tuesday may have been due to comments from policymakers at several major central banks, who expressed a general reluctance to lower interest rates.

In the US, Federal Reserve spokespeople repeated the mantra that rates should remain at their current level until further progress had been made in returning inflation to its 2% target.

The minutes of the May meeting of the Federal Open Market Committee (FOMC) will be published on Wednesday, which could offer new clues about the outlook for the US Federal Reserve (Fed) interest rates.

In Australia, policymakers at the Reserve Bank of Australia (RBA) even discussed raising interest rates to combat persistent inflation, and the Reserve Bank of New Zealand (RBNZ) implemented a “maintenance” rates with a hawkish tone” during the Asian session on Wednesday.

The expectation of higher interest rates for longer strengthens these currencies by attracting more foreign capital inflows.

Data day in Mexico

Mexican Peso traders are looking forward to the release of a series of economic data for Mexico, which will be released on Thursday.

Among them, the final estimate of the Mexican Gross Domestic Product (GDP) for the first quarter, the intermonthly inflation for the first half of May, the minutes of the last monetary policy meeting of the Bank of Mexico (Banxico) and the activity data March economy.

Technical analysis: USD/MXN forms a bullish reversal

The USD/MXN – or the number of pesos that can be purchased with one US Dollar – rises on Wednesday after forming a bullish reversal day on Tuesday (shaded rectangle in the chart below).

USD/MXN daily chart

Tuesday's movement is not enough to confirm a trend reversal, but if it is followed by another bullish day, it will gain validity.

A break above the green downtrend line would be necessary to confirm a short-term trend reversal.

USD/MXN has reached the conservative target, at 16.54, for the breakout of the range that formed from mid-April to early May. The conservative estimate is calculated as the 0.618 Fibonacci ratio of the range height extrapolated downward.

The pair remains in a downtrend and there remains a high risk that the bears will continue to push it lower. The next bearish target is 16.34, the full height of the extrapolated downward range. A break below Tuesday's low at 16.53 would signal a continuation lower.

Since the medium and long-term trends are also bearish, the probabilities favor declines even more.