12/09 WEDNESDAY | 12:00 GMT | MXN MEXICAN INFLATION (CPI) REPORT (NOV)

The November Mexican inflation (CPI) report will be released on Wednesday, December 9 at 13:00 GMT. According to a Bloomberg News survey, a slight moderation in price pressures is anticipated with the headline inflation rate due in at 3.41% from 4.09% in October. While weaker price pressures are not surprising in the face of the coronavirus pandemic, the changing composition of Banxico suggests that weaker inflation data may be the excuse needed to restart a rate cut cycle.

At the start of the week, Mexican President Andres Manual Lopez Obrador nominated Galia Borja Gomez, the Treasurer of the Mexican Finance Ministry, to join Banxico has deputy governor. Historically, Banxico has had a hawkish tilt, seeking to keep price pressures down even if it meant constraining growth. But the ascent of Gomez to deputy governor, coupled with downside price pressures, may be cultivating an environment where Banxico seeks to tamp down the Mexican Peso.

What appeared to be a clear path towards Mexican Peso strength post-US presidential elections have become more complicated in the near-term. Pair to Watch: USD/MXN

USD/MXN RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 1)

There has been a considerable downside in USD/MXN rates in recent weeks, with the pair continuing its descent within the parallel downtrend dating back to the coronavirus pandemic high set in April. Since the test of channel resistance at the start of November, which came in the form of a bearish outside engulfing candle, USD/MXN rates have been biased lower.

Bearish momentum has been strong, with USD/MXN rates below their daily 5-, 8-, 13-, and 21-EMA, which is in bearish sequential order. But daily MACD is trending higher below its signal line, while Slow Stochastics are perking up in oversold territory. Still, in the past two weeks, two significant Fibonacci retracement levels serving as critical support have broken: the 76.4% retracement of the 2020 low/high range at 20.2349; and the 38.2% retracement of the past 10-years of trading low/high range (April 2011 low/April 2020 high) at 20.3215.

Were USD/MXN rates to retake the 20.2349/20.3215 area, the daily 5-, 8-, 13-, and 21-EMA envelope would be broken, giving credence to a bullish reversal. Nevertheless, the broader context of any USD/MXN price action would be in context of the broader downtrend, suggesting that rallies may look to be sold in the foreseeable future.

TRACKING CAD & MXN POSITIONING

The close proximity of both countries given their trade relationship with the United States also means that their currencies tend to trade in a similar fashion as well. To this end, the 20-day correlation between USD/CAD and USD/MXN rates is currently +0.31 and the 50-day correlation is +0.89. One week ago, on December 1, the 20-day correlation was +0.59 and the 50-day correlation was +0.92.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (DECEMBER 7, 2020) (CHART 2)

USD/CAD: Retail trader data shows 73.92% of traders are net-long with the ratio of traders long to short at 2.83 to 1. The number of traders net-long is 13.28% higher than yesterday and 3.20% higher from last week, while the number of traders net-short is 28.99% higher than yesterday and 3.37% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.