The Mexican peso pushed USD/MXN to 24-month lows below 17.00 on Friday, before the pair rebounded to 17.02 after touching 16.97. A softer tone in US data weighed on the dollar: Retail Sales fell 0.6% month on month versus forecasts for a 0.1% rise and June’s 0.2%, while the University of Michigan sentiment index slipped to 51 from 55.2, with inflation expectations little changed. With consumer and producer prices edging lower, markets priced out a Fed hike in 2026; for September, probabilities were 32% for a hike and 68% for no change.
In Mexico, the calendar turns to the Bank of Mexico meeting minutes and Retail Sales, with US releases including housing data, the ADP Employment Change four-week average, jobless claims and flash PMIs. On charts, USD/MXN traded near 17.0294, below the Moving Average Triple clustered around 17.3775 and under a descending resistance line near 17.4197, as the 14-day RSI hovered around 27. Key downside reference sat at 15.6176, while a recovery would need to retake 17.3775 and then break 17.4197.
Volatility Outlook and Macro Implications
With the USD/MXN pair hovering near two-year lows around 17.02, we believe derivative traders should prepare for heightened volatility in the coming weeks. The recent drop in U.S. retail sales by 0.6% and sagging consumer sentiment have convinced the market that the Federal Reserve will likely hold rates steady, with odds for a September pause currently sitting at 68%. We see this macroeconomic shift as a prime opening to position for continued peso strength, especially with the pair trading below key moving averages.
We must closely watch the upcoming Bank of Mexico (Banxico) meeting minutes to gauge how long policymakers will maintain their benchmark interest rate, which currently stands at a high 10.50%. This massive yield differential of over 500 basis points compared to the U.S. Federal Funds rate continues to make the Mexican Peso a highly attractive target for carry trades. Derivative traders can exploit this environment by utilizing short-dated USD/MXN put options to capture further downside while limiting risk.
Technical Signals and Trade Strategies
From a technical perspective, the daily Relative Strength Index (RSI) for USD/MXN has dipped to 27, indicating that the pair is heavily oversold. While some traders might expect a temporary corrective bounce toward the 17.37 resistance level, we recommend using any short-term rallies to establish new short positions. Historically, when the RSI falls below 30 during a strong downtrend, the momentum often carries the price lower toward long-term support levels, which currently align near 15.61.
We also suggest monitoring trade negotiations, particularly after Mexico’s Economy Secretary Marcelo Ebrard requested a reduction in the 25% tariff on Mexican-made vehicles. If the U.S. agrees to ease these tariffs, it could spark a massive wave of foreign direct investment into Mexico’s manufacturing sector, further boosting the peso. We advise traders to hedge against sudden trade-related volatility by buying out-of-the-money call options on the Mexican Peso to benefit from sudden breakout moves.
