Very clearly, USDMXN is testing the upper bound resistance of a long running channel that has began around the Mexican Peso Crisis of 1994. Historically, this has been tested three times and given the underlying fundamentals related to inflation expectations between Mexico and the US and the risk reward of selling USDMXN as a carry trade it seems improbable for this resistance area to be breached. It seems likely that any push above this level will significantly increase the probability of a strong reversal which would imply that traders on balance would be far more unwilling to take on the high cost of carrying a dollar overnight position due to the high financing costs than to take short positions that would result in positive financing payments.
Given the exogenous shock of Covid19 already devaluing the peso by 30% most likely being driven by the unwinding of carry trades it seems also improbable for significant momentum to build above the channel upper bound since the repricing has mostly happened already and any further rebalancing would seem more likely to push the dollar weaker with continued growth in carry trades seeking yield. With the Fed pushing unprecedented dollar liquidity in the global markets it almost seems crazy for longs to be buying USDMXN as a hedge against the backdrop of further economic decline due to Covid19 given the technical positioning of USDMXN on a historical timescale.
One can see very clearly the numerous shocks to the USDMXN over time including "Trump" and the Great Recession. In both cases, tests of the upper channel bound were resisted with extended periods followed of peso strengthening. Given the interest rate differential with the expectation of zero to negative interest rates for the US for the foreseeable future (i.e. 2 years+ seems likely) and higher inflation expectations in Mexico the timing of entries to carry trade the peso seems ideal. Continued weakness in the peso would not benefit the US and it would make sense for the Fed and IMF to intervene in some way to shore up the peso around this area to stabilize global markets.
Also, Mexico has hedged significant amounts of their oil production, which protects them in dollar terms from a decline in oil prices during 2020 though an institutional decline in oil price could reflect a negative longer term outlook for the Mexican economy in the face of overall existing structural weakness (i.e. in the form of corruption and low productivity growth).
Given the prospects of both a political shift in the November 2020 elections and a strong recovery driven by foreign investment seeking yield the overall risk/reward of carrying a dollar peso trade seems very reasonable despite an extreme level of volatility. Obviously, it's critical to keep positioning in line with an overall portfolio that's "safe", i.e. largely leaving cash/liquidity available for rebalancing as needed assuming FX positioning is leveraged.
Given the exogenous shock of Covid19 already devaluing the peso by 30% most likely being driven by the unwinding of carry trades it seems also improbable for significant momentum to build above the channel upper bound since the repricing has mostly happened already and any further rebalancing would seem more likely to push the dollar weaker with continued growth in carry trades seeking yield. With the Fed pushing unprecedented dollar liquidity in the global markets it almost seems crazy for longs to be buying USDMXN as a hedge against the backdrop of further economic decline due to Covid19 given the technical positioning of USDMXN on a historical timescale.
One can see very clearly the numerous shocks to the USDMXN over time including "Trump" and the Great Recession. In both cases, tests of the upper channel bound were resisted with extended periods followed of peso strengthening. Given the interest rate differential with the expectation of zero to negative interest rates for the US for the foreseeable future (i.e. 2 years+ seems likely) and higher inflation expectations in Mexico the timing of entries to carry trade the peso seems ideal. Continued weakness in the peso would not benefit the US and it would make sense for the Fed and IMF to intervene in some way to shore up the peso around this area to stabilize global markets.
Also, Mexico has hedged significant amounts of their oil production, which protects them in dollar terms from a decline in oil prices during 2020 though an institutional decline in oil price could reflect a negative longer term outlook for the Mexican economy in the face of overall existing structural weakness (i.e. in the form of corruption and low productivity growth).
Given the prospects of both a political shift in the November 2020 elections and a strong recovery driven by foreign investment seeking yield the overall risk/reward of carrying a dollar peso trade seems very reasonable despite an extreme level of volatility. Obviously, it's critical to keep positioning in line with an overall portfolio that's "safe", i.e. largely leaving cash/liquidity available for rebalancing as needed assuming FX positioning is leveraged.