Deteriorating Technicals Suggest Weakness Ahead For Regional FX
Latin American exchange rates have taken out several key support levels in recent days and we see scope for further depreciation in the coming weeks. Ongoing US dollar strength, a sovereign default in Argentina, and a sell-off across emerging and developed market assets underpin this view. Standard & Poor's declared Argentina to be in selective default on July 30 after missing a coupon payment on its restructured debt. Further delays in working out a deal for the Argentine government to pay bondholders, or an acceleration in claims from other creditors via cross-default provisions, could see a significant deterioration in investor sentiment towards Latin American assets ( see 'Settlement With Holdouts Still Likely After Default', July 31). In addition, a sustained break key of resistance at 81.17 for the US dollar index would be a strong signal that a more prolonged period of weakness in regional FX is on the cards.
The Mexican peso (MXN) remains one of our favourite regional currencies from a fundamental standpoint, but a significant deterioration in the technical picture has tempered our bullishness in recent days. Indeed, sharp MXN weakness and a break of key support for the peso against the euro informed our decision to exit our bullish MXN versus euro view in our Asset Class Strategy on July 31 ( see 'Closing Bullish Mexico Peso Against Euro View', July 31). Following a break of trendline support around MXN13.00/USD, the unit is now approaching key trendline support around MXN13.25/USD. While regional currencies, including the MXN, have pared back some of their losses in recent trading, suggesting a period of consolidation in the near term, a sustained break of this level could see the peso head back towards its 2014 low of MXN13.50/USD in the first instance.
Moreover, the monthly chart shows little significant technical support between MXN13.25/USD and MXN13.90/USD. While our core view is not for such a significant sell-off, and the unit has held support at MXN13.25/USD at present, a sustained correction in global markets could see substantial further depreciation for the MXN.
|Appreciatory Trend On Ice|
|Mexico - Exchange Rate, MXN/USD (Weekly)|