- The Mexican Peso recovers as tensions in the Middle East abate temporarily.
- Several sources of geopolitical risk, however, continue to present threats to the Peso.
- A new Omicron variant of the Covid virus is spreading, though symptoms appear mild so far.
The Mexican Peso (MXN), which is especially vulnerable to geopolitical risk, is edging higher in most pairs on Monday morning as relief ripples through markets due to a temporary easing of tensions in the Middle East.
The Israel-Iran conflict has not escalated in the way markets feared. The one-off Israeli attack on a military base outside Isfahan on Friday has not led to a counter-punch from Iran as yet, and as a result, the Mexican Peso has recovered.
From a peak of 17.92 on Friday – when fears of escalation were at their most extreme – the USD/MXN has fallen to 17.02 on Monday.
On the data front, the week ahead sees the release of Mexican Economic Activity on Monday, 1st half-month inflation and core inflation on Wednesday, and Balance of Trade as well as Jobless Rate data on Friday. These are unlikely to move the dial much on MXN unless they show significant deviations from past results or estimates.
Mexican Peso is still at risk
The Mexican Peso’s sharp decline at the end of last week was triggered by geopolitical risk, which seems to be the currency’s most significant driver at the moment.
Although hostilities in the Middle East have temporarily subsided, the threat of outbreaks in the future continues to present a risk to the currency.
According to the Chief Foreign Affairs Commentator for the Financial Times, Gideon Rachman, Russia, Iran, North Korea and China now constitute an “axis of adversaries” who are working together against the West. Rachman points out that the military base outside Isfahan targeted by the Israelis is, in fact, a nuclear enrichment site which utilizes Chinese-supplied reactor technology.
Yet the Middle East is not the only potential source of geopolitical risk. Reports of a fresh strain of the Omicron variant of the Covid-19 virus have also destabilized markets at the start of the new week.
“While the WHO is urging caution, it noted that symptoms linked to the new strain so far have been mild. Because it will take some time to determine the likely impact on the global economy, we believe risk aversion will continue this week,” say analysts at private investment bank Brown Brothers Harriman in a note on Monday.
A handful of countries have already introduced minor social distancing measures, but if the strain begins to spread and pose a more serious health risk, this could present a fresh risk factor for investors, leading to a steady stream of funds into safe-havens and out of riskier assets like the Mexican Peso.
Technical Analysis: USD/MXN settles back down
USD/MXN – the value of one US Dollar in Mexican Pesos – has pulled back down after briefly breaking above a major trendline for the long-term downtrend.
The breakout higher was not enough to reverse the long-term downtrend but it did change the picture on the short-term and intermediate-term horizons, which now could be said to have reversed their bearish tenors, favoring long positions over shorts.
USD/MXN 4-hour Chart
That said, the new short-term uptrend on USD/MXN is showing signs of weakness already as the pullback from Friday’s peak continues and a lack of fresh bullish momentum injects price appreciation. Support from the 200-day Simple Moving Average (SMA) at 17.17 also now appears to have been broken. A negative close on Monday would confirm a bearish Shooting Star Japanese candlestick pattern on the daily chart, with bearish overtones.
A decisive break above the trendline at roughly 17.45 would be required to provide bullish reconfirmation and activate an upside target at roughly 18.15.
A decisive break would be one characterized by a longer-than-average green daily candlestick that pierces above the trendline and closes near its high, or three green candlesticks in a row that pierce above the level.
The Relative Strength Index (RSI) has now exited overbought territory and reentered neutral ground, suggesting fresh scope for upside.
If a pullback persists, however, support from the 100-day SMA at 16.96 followed by the 50-day SMA at 16.82 is likely to provide a foothold for the backsliding price.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Source: https://www.fxstreet.com/news/mexican-peso-recovers-as-middle-east-tensions-abate-202404220945