Mexican Peso recovers as Middle East tensions abate

• 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.