In a move to curb inflationary pressure, the Bank of Mexico raised interest rates by 50 basis points to 4.25% on June 30th. The analysts and the market as a whole were expecting only a rate cut of about 25 basis points. This unexpected level of hike set the Mexican Peso on an upward trajectory against most of the major currencies, including the Japanese Yen. However, the political uncertainty in Turkey and the terrorist attack in France have resulted in a trend reversal in the MXNJPY pair. The downtrend is likely to continue due to the reasons provided below.
The increase in the volatility in the financial markets has caused a rise in the demand for safe-haven assets. The Japanese Yen, being one of the most sought after safe-haven currencies, is now showing signs of another rally against the Mexican Peso. The coup attempt in Turkey is also expected to propel the demand for the currency of the third-largest economy in the world.
Mexico is also affected by the drop in the price of crude oil. Until a year ago, the revenue from crude oil funded more than one-third of the federal budget. It has dropped to a level of about 20% now. The weakness in the crude price still affects the government’s spending, thereby creating weakness in the Mexican Peso. The Instituto Nacional de Estadística y Geografía (INEGI) stated that the unemployment rate in May increased to 4%, from 3.8% in April. Furthermore, the second-largest economy in Latin-America reported a lower than expected GDP growth in the first quarter of 2016. The economy expanded 2.6% in the first quarter, compared to analysts’ expectation of 2.9%. Considering these aspects, we can expect the MXNJPY pair to remain bearish in the short-term. It should be noted that the long-term trend is in favor of the Mexican Peso.
Technically, the MXNJPY pair has risen from a low of 5.30 to hit the major resistance at 5.80. The MACD indicator is moving deeper into the bearish zone below the zero line. Thus, we forecast a downtrend in the MXNJPY currency pair. The Fibonacci retracement line indicates possible support for the cross at 5.43 levels.
So, a currency trader can contemplate selling at the prevailing level of 5.65 with a stop-loss above 5.75. The profit for the short position can be taken near 5.45 levels.
A binary options trader can use a one-touch put option contract to benefit from the highly probable decline in the MXNJPY pair. With a strike price of above 5.45 and an expiry period of two to three weeks, the likelihood of succeeding in the put option trade is higher.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
