The Mexican peso regained ground on Friday, rising 0.5% against the US dollar, yet it was still set for a weekly decline of 3% as carry trade positions unwound with the US–Mexico interest rate gap at its narrowest since 2015. USD/MXN eased to 18.21 after touching 18.35, with the broader move driven by a shrinking yield advantage and shifting expectations for Federal Reserve policy. A private survey of economists for Banxico pointed to rates staying at 6.5% through end-2027, while markets still weighed the risk of a 25 basis-point Fed move later this year, a path that would leave a 2.25% differential.
US data softened the near-term hiking narrative. September Nonfarm Payrolls came in at 29K versus 90K expected and 133K previously, while the jobless rate rose to 4.2% from 4.1% as participation increased; according to Prime Terminal data, the implied odds for an October 28 hike were 23% versus 77% for a hold. In Mexico, S&P Global data showed September manufacturing expansion, and attention turns to Banxico minutes; upcoming US releases include ISM Services PMI, further jobs figures, FOMC minutes, a speech by Governor Bowman and the University of Michigan sentiment survey.
Carry Trade Unwind and Interest Rate Dynamics
We are seeing a significant shift in the currency markets as the highly popular Mexican Peso carry trade continues to lose its appeal. With the interest rate gap between the US and Mexico narrowing to its lowest level in years, the upward momentum for USD/MXN remains firmly in place. Derivative traders should prepare for continued upward pressure on this currency pair in the coming weeks.
Although the overall trend points upward, the daily Relative Strength Index (RSI) for USD/MXN has climbed to an overbought level of 77. This suggests that the immediate upside momentum is stretched and we could see a brief period of profit-taking or consolidation. Instead of chasing the rally at these current highs, we should look to establish long USD positions on pullbacks toward key support levels.
Technical Levels and Trading Strategy
The immediate support zone lies around the 18.12 level, which previously acted as a key resistance line. If the price breaks below this area, we expect a deeper pullback to find solid footing near the moving average cluster around 17.23. We can utilize structured options strategies, like buying call options on dips, to limit downside risk while positioning for the next leg up.
Recent market data supports this cautious but bullish outlook on USD/MXN. Global positioning reports show that speculative net-long contracts on the Peso have dropped significantly from their earlier peaks, indicating that institutional investors are rapidly unwinding their exposure. This massive liquidation of long peso positions suggests that any short-term rebounds in the Mexican currency will likely be met with heavy selling.
Over the coming weeks, we must closely monitor the upcoming release of central bank meeting minutes from both Banxico and the Federal Reserve. Any signs of further monetary easing in Mexico or unexpected resilience in US economic data will likely accelerate the carry trade exodus. We should keep our trade sizes conservative to successfully navigate the heightened volatility expected around these key macroeconomic releases.
