Mexican Peso weakens on domestic woes, technicals favor short-positioning

• The Mexican Peso continues weakening on Friday. 
• Continued domestic woes and technical trading may be weighing on MXN. 
• Technically, USD/MXN finds a firm bedrock of support at the base of a channel and recovers. 

The Mexican Peso (MXN) is falling in its key pairs on Friday as the currency suffers from political risk premia, the outlook for the domestic economy and as chart technicals favor short-positioning.

Mexican Peso depreciates amid political concerns  

The Mexican Peso depreciated for the second day in a row in its most heavily traded pairs on Thursday as domestic headwinds continued to weigh on investor confidence. Reforms to the judiciary, the abolition of autonomous regulatory bodies and the perilous state of the public finances, including those of public-owned companies such as the Mexican state-owned Oil company Pemex, are all taking a toll.   

The Bank of Mexico is widely expected to cut interest rates by 25 basis points (bps), from 10.75% to 10.50%, at its meeting on Thursday. Although this is less than the Fed's 50 bps cut, the expectation of lower interest rates is still generally negative for a currency since it lessens foreign capital inflows. 

The Peso lost the most ground against the Pound Sterling (GBP) and the Euro (EUR) on Thursday as both these currencies' central banks are likely to take a more measured approach to cutting interest rates compared to the Fed. 

In fact, the Bank of England (BoE), which had its meeting on Thursday, decided to keep interest rates unchanged amid still-high core inflation. For the Euro, wage inflation is expected to remain inflationary until the end of the year, preventing the European Central Bank (ECB) from slashing interest rates aggressively in the Eurozone. 

Technical Analysis: USD/MXN extends recovery from base of channel

USD/MXN is finding technical support at the base of a long-term rising channel and recovering slowly. 

Although the pair declined sharply last week it found key support from the base of a long-term rising channel and the 50-day Simple Moving Average at just above 19.00, which has so far prevented a deeper slide. 

USD/MXN Daily Chart 

There is a possibility now that USD/MXN has found stability at these support levels and is launching a recovery leg back up within the channel, thereby extending the medium and long-term uptrends. 

USD/MXN formed a Bullish Engulfing candlestick pattern (albeit small) on Wednesday and followed through higher on Thursday, thus providing confirmation. This is another possible sign the short-term trend could be reversing. A close above 19.53 (August 23 swing high), however, would be required to shift the diagnosis to bullish in the short-term. 

Alternatively, a decisive break below the lower channel line and 50-day SMA could still be possible, although less likely now. Such a move would alter the outlook and indicate a continuation of the near-term downtrend. 

A decisive break would be one accompanied by a long red candle that pierced well below the channel line and closed near its low, or three down days in a row that broke clearly below the line.