The USD/MXN exchange rate has rebounded sharply in the past few weeks. The pair jumped to 16.7 on Tuesday morning, its highest swing since March 22nd. It has soared by more than 3.13% from its lowest point this month.
Hedge funds are bullish on the Mexican pesoThe Mexican peso has been in a strong freefall as the US dollar has continued soaring. Data shows that the US dollar index (DXY) has soared to almost $106.50 and is hovering at its highest level since November last year.
The greenback has soared against most currencies, including the Philippine peso, Malaysian ringgit, and the euro. It has also jumped to a multi-decade high against the Japanese yen even after the BoJ hiked interest rates.
The dollar has jumped as investors reduce their bets about the number of interest rate cuts that the Federal Reserve will implement this year. Most analysts believe that the Fed does not have the urgency it needs to start slashing interest rates soon.
That’s because US inflation has remained stubbornly high this year. The headline Consumer Price Index (CPI) has remained above 3.5% while the core CPI is almost double the Fed’s target of 2.0%.
Still, hedge funds are increasingly bullish on the Mexican peso. According to the CFTC, long bets on the peso jumped to a high of 139.7k last week, the highest it has been since 2020. This positioning partly explains why the USD/MXN pair has crashed by more than 24% from its highest point since November 2021.
Hedge Funds have built the largest long position in the Mexican Peso in 13 months pic.twitter.com/Ya0sDSkgwb
— Barchart (@Barchart) April 16, 2024There are a few catalysts for the Mexican peso. First, there are signs that the ongoing migration crisis in the US will lead to more remittances to Mexico. Data shows that remittances to the country jumped by 7.6% to $63.3 billion in 2023 and the trend may continue.
Second, Mexico could benefit from the rising oil prices. Brent and the West Texas Intermediate (WTI) have jumped to $91 and $87 as the geopolitical crisis in the Middle East continue. Mexico is a major oil producer.
Third, there are signs that Mexico is benefiting from the nearshoring trend as many companies move plants to the country. China’s BYD is now considering putting up a plant in the country to take advantage of the American market. FDI to the country jumped to over $35.3 billion in 2023.
However, there are signs that the divergence between the Fed and the Mexican central bank will continue. The Fed will likely maintain rates at the current level while the Mexican bank has started slashing rates. This divergence could move more investors from the Mexican peso to the US dollar.
USD/MXN technical analysis
The USD to MXN exchange rate has bounced back in the past few days. It has jumped from a low of 16.25 to a high of 16.77. The pair has also moved above the crucial resistance point at 16.64, its lowest swing in July last year.
It has also jumped above the 50-day moving average while the Relative Strength Index (RSI) has drifted upwards. The RSI has jumped above the neutral point at 50.
Therefore, the pair will likely continue rising in the coming weeks as bulls target the crucial resistance at 17. The alternative scenario is where the pair retreats and retests the crucial support at 16.25, its lowest swing this month.
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