USDMXN has come onto our radar recently as it has moved inversely to our proprietary model, with the model rallying and price continuing to fall.
These models were built in an effort determine where many of the FX pairs should be trading, thus we continuously monitor currencies which we have deemed to have a stronger degree of explanatory power using our regression analysis (R2), with variables which we see as statistically significant.
Our proprietary model, which takes into account the VIX Index, CRB Index and the 10-year interest rate differential between the United States & Mexico – produces an R2 of 0.8545 since the beginning of 2011 and currently implies a “fair value” of 12.8512. Based on current levels, this suggests that USDMXN is approximately 2.66 standard deviations below this reading.
Technically speaking, USDMXN has been in a steady downtrend after taking out the previous 2012 lows around 12.5500 and then long-term trendline support, drawn from the 2008 low, near 12.4850. Sure enough, it found support towards the end of last week, just ahead of the noted June 2011 high at 12.0150/70 – See Technical Update. Interestingly, just nearby (12.0460/70) sees the long-term 61.8% retracement of the 2008-2009 rally, which could also end up providing support.
Next week and a half sees a few key events in Mexico which may trigger such a scenario:
- 4/19 – Mar. Unemployment rate: Market consensus 4.67%, from 4.85% in Feb.
- 4/22 – Feb. Retail Sales: Previously 1.8%
- 4/26 – Mar. Trade Balance: Prior was 46.1M
- 4/26 – Central Bank of Mexico rate announcement: Expected unch. at 4.00%
Keep in mind, USDMXN could rally back towards 12.5500 (prior trendline support, turned resistance), without disrupting the technical break lower in March. Above there could test the 100-day sma near 12.6335, and then the 200-day sma around 12.8535. Meanwhile, if USDMXN were to break below the psychological 12.0000 level it would negate this bias and could likely see it revisit the 2011 lows around 11.4850/80.