Contingent on Energy Shortages and US Yields

USD/MXN Forecast: Neutral

The Mexican Peso hasn’t fared too well this past week and is down 2.7% this week against four major currencies (USD, GBP, EUR, and JPY).

Mexican Peso Forecast: Contingent on Energy Shortages and US Yields

USD/MXN has been able to consolidate a push above the 20 Pesos mark, gaining traction as the pair managed to break above the 76.4% Fibonacci at 20.18. The main objective for bulls is likely to be a push above the yearly high at 20.60, before attempting to reclaim the 21 Pesos mark.

USD/MXN Daily chart

USD/MXN Daily Chart

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Some of the weakness attributed to the Mexican currency this week has to do with the power outages seen in Texas. Mexico is a big importer of natural gas from the United States and a reduction of roughly 75% in Texas pipelines has left the Latin American country concerned about its economic outlook as power shortages could make the recovery from the Covid-19 pandemic much more fragile.

The Mexican President was seen urging citizens to consume less power during peak times in order to ensure that the national electricity system is able to continue functioning and avoids blackouts. News that Texas was banning all exports of natural gas until February 21st to ensure the state was able to cope with an unusual winter storm put further pressure on the Peso, despite Mexico’s efforts to stop the ban from taking place.

Jose Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth (IDIC), has grave concerns over the natural gas export ban. He has forecasted that the reduction in supply could cause a one percentage point fall in Mexico’s GDP in the first quarter of this year, justified by the fact that workflows would be impacted and big factories in the north of the country have already reported disruptions.

Elsewhere, higher bond yields and weaker than expected jobs data have kept the US Dollar somewhat supported, playing into the clues of greater economic recovery from treasury yields whilst juggling its safe-haven demand on weaker data. I expect USD/MXN to attempt to capitalize on further upside this coming week, although bullish momentum is likely to be harder to find in an attempted move higher, so we may see sideways consolidation before any significant moves can be seen, especially if we see a return to normalcy with regards to energy supply from the US.

There is a fair bit of economic data out next week for Mexico, but I expect most of it to be ignored by the markets given they are lagging indicators. An interesting data point may be the half-month CPI for the month of February as it may provide further insight into the next move by the Mexican Central Bank with regards to interest rates.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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