A Guide to USD/MXN Currency Pair

USD/MXN is known as an “exotic” currency pair as it involves one major currency, the US dollar, paired with the Mexican peso, which is the currency from a less commonly traded economy. 

This is not so different from any major currency pair, as it has a base and a quote currency. That means USD/MXN works in exactly the same way. 

What does make it slightly different from other pairs is its volatility and liquidity. USD/MXN gives forex trading its appeal and diversity as it is impacted by trade events and commodity prices. Mexico is also primarily an export-oriented economy, so it will be liable to shifts in wider geopolitical events.

This guide covers key aspects of trading USD/MXN. From historical market events to the best time to trade, we cover the main areas you need to know to potentially take advantage of trading this exotic currency pair. 

Key Points

• USD/MXN is an exotic currency pair involving the US dollar and Mexican peso, offering unique trading opportunities due to its volatility.

• Traders can potentially profit from USD/MXN by leveraging its price movements, either by buying low and selling high or shorting the pair.

• Effective risk management, such as using stop-loss orders and proper position sizing, is crucial for successfully trading USD/MXN.

What is USD/MXN Trading? 

USD/MXN trading involves buying and selling the base currency, the US dollar (USD) against the quote currency, the Mexican Peso (MXN). The exchange rate tells you how many pesos you need to buy one US dollar. 

Individuals who trade USD/MXN aim to take advantage of volatility and price movements in the exchange rate. They can do this in two ways, firstly either by buying the pair low and selling high.

Or traders can profit from falling prices by selling the cross with the expectations of buying it back at a lower price later. That is known as “shorting” the pair. 

USD/MXN History 

The Mexican peso was initially based on Spain’s official currency which was the Spanish dollar. The Mexican peso’s name originated from the silver eight-real coins issued by Spain in Mexico. 

After gaining independence from Spain in 1821, Mexico used the peso as its currency. More recently, the oil crisis in 1979 saw Mexico experience years of debt defaults and inflation. 

The signing of the North American Free Trade Agreement (NAFTA) took place in 1992. At the end of 1994, the Foreign Exchange Commission, made up of officials from the Ministry of Finance and Banco de Mexico, determined that the exchange rate would be determined by market forces ie. a floating exchange rate / free float regime ^[1]. 

Why Trade USD/MXN? 

USD/MXN offers an attractive trading instrument for traders seeking more volatility and the potential for profit. Here’s some of the key benefits of trading USD/MXN:

• Global Macro Gauge: The peso can be heavily influenced by commodity and oil prices, which is a major export for Mexico. These assets can sometimes act as a global macro indicator for how the wider economy is performing and where it is in the economic cycle. For example, a rise in commodity prices should see an increase in the value of MXN. 

• Carry Trade: One of the drivers of increased peso trading in recent years lies in the “carry trade”. This is where investors will capture the differential of interest rates in different countries by borrowing funds from a low interest rate country and buying in a country with higher rates. Mexico’s central bank began raising rates above that of the US and other countries in 2021. Probably the most popular carry trade is MXN/JPY.

• Volatility: USD/MXN has been known to show relatively dynamic price action. Unforeseen domestic events, like the recent election, as well as global geopolitics can create volatility. This might enable traders to take advantage of these price moves, potentially offering higher returns. But traders need to be comfortable with managing higher risk. 

• Trading Hours: USD/MXN can be traded 24 hours a day, 5 days a week. Like other currency pairs in the forex market, trading hours are spread across different time zones. Liquidity can vary in certain parts of the day, but buyers and sellers are active across various different trading sessions. 

• Versatility for Different Trading Styles: USD/MXN can cater to various trading styles. Day traders can exploit short-term, intraday price moves which can depend on multiple factors. Position traders like to hold longer-term trades, possibly for weeks or month, based on fundamental analysis. Swing traders attempt to exploit short to medium-term price volatility, mainly using favourable risk/reward metrics through technical analysis.  

Historical Trends of USD/MXN 

1994

The Mexican peso currency crisis was sparked by an abrupt devaluation against the US dollar by the incumbent government. This became one of the first international financial crises ignited by capital flight. ^[2]

The administration was reliant on foreign investors to buy its debt, after it embarked on an expansionary fiscal and monetary plan ahead of the elections. But political instability caused investor confidence to evaporate, which eventually led to the country facing default. 

2008

The Global Financial Crisis saw huge volatility in markets with a stark flight to safety bid. That meant the safe haven US dollar was heavily in demand as the world’s premier reserve currency. MXN was sold aggressively, which saw USD/MXN surge from 10.26 to 14.33 in the matter of a few weeks in September and October 2008. 

Recent News

Mexico has benefitted hugely from nearshoring in recent years. That is a growing trend which encourages US to manufacture goods closer to home. It placed a renewed focus on trade and increased attention from investors on the rising peso. USD/MXN has sold off from over 24 to under 17 from 2020 to 2024. 

But June 2024’s shock election win by Claudia Sheinbaum has seen the peso lose 8% in value. That is due to fears that the Morena party could push through some non-friendly market constitutional reforms. 

USD/MXN Prediction

Caution reigns over MXN during June 2024 as the new political environment leaves much domestic uncertainty. But on the monetary front, the central bank, Banxico, recently shifted to a more hawkish stance after raising its core inflation forecasts higher. Interest rates currently sit at 11%, even after the most recent cut. The Mexican peso has also been popular due to the risk-adjusted carry trade. 

Going forward, investors will need to keep an eye out for the November US Presidential election. Who wins and whether a new trade war kicks off will be key for MXN. Investment banks see the 12-month prediction at 16.50. 

What Moves USD/MXN? 

1. The US Federal Reserve:

The Federal Reserve is the US central bank that has three specific goals: maximum employment, stable prices and moderate long-term interest rates. In the broadest term, its monetary policy works by spurring or restraining economic growth. A strong economy typically sees buying in the dollar. Conversely, periods of recession or sluggish growth can weaken USD. Key economic indicators such as employment data and inflation will contribute to currency volatility. 

2. Mexico’s Central Bank (Banxico): 

Decisions made by Mexico’s central bank, Banxico, regarding interest rates can affect the value of the peso. 

For example, if Banxico opts for higher interest rates and restrictive policy to curb high inflation, it enhances the attractiveness of MXN for investors seeking yield. That potentially strengthens its position against the dollar and other currencies, leading to a fall in USD/MXN.

Conversely, lower interest rates implemented by Banxico may diminish the appeal of the peso, leading to a decrease in its value relative to other currencies. That would mean USD/MXN moving higher. 

As such, both the Fed and Banxico decisions regarding interest rates are closely monitored by markets, as they directly impact currency dynamics.

US Non-Farm Payrolls: 

Non-farm payrolls data is an important monthly economic indicator which has a big influence on both Federal Reserve monetary policy and financial markets. The widely watched headline figure is considered a key marker of US economic health as it measures the total number of jobs added or lost in the US economy over the previous month. 

The figures are important as policymakers at the Federal Reserve will use all the available data to analyse the current state of the economy. The report contains huge insight into the labour force that will have a direct impact on policy, interest rates and future levels of economic activity.  This will affect the stock market, the value of the dollar and other financial assets.

For instance, a strong payrolls report may be taken as a sign of a robust economy which carries with it inflationary pressures which will boost the dollar against other currencies. A series of similar data could lead to an interest rate hike by the Fed, which will have repercussions for all markets.

Economic ties between both countries: 

The close economic ties between the US and Mexico mean that economic data in the US can have a major impact on its neighbour. All things equal, a strong US economy augurs well for Mexico. Recently, “nearshoring” by American companies has had a big influence on Mexico’s economy, creating a ripple effect across diverse industries. This is a relatively new transformative economic phenomenon in which a company delegates a portion of its production to third-party entities situated in foreign countries, yet within close proximity. ^[3]

Geopolitical events and trade agreements: 

A geopolitical event can serve as a catalyst for currency movements, potentially favouring USD as a safe-haven asset. During periods of heightened political instability or conflicts, investors often flock to the stability offered by the greenback, leading to an increase in demand and subsequent appreciation against currencies such as MXN. 

Moreover, political events within the US and Mexico can also exert influence on the value of their currencies. Domestic political developments, including shifts in policy and uncertainty surrounding elections, can significantly impact investor sentiment and USD/MXN. 

Trade agreements, like the North American Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA) can also have a big impact on USD/MXN. 

Cross-border trade totalled $779.3 billion in 2022 making Mexico the United States’ second largest trading partner. Furthermore, Mexico was the US’ biggest provider of goods and the second largest export market. In fact, over $1.2 million in products move across the border every minute, making it the busiest in the world. Any change in trade dynamics may lead to outsized moves in the currency pair. ^[4]

Read our complete article guide to supply and demand to help you better understand the concept.

USD/MXN Correlations ^[5] 

Positive Correlations

USD/CAD

USD/CAD is positively correlated with USD/MXN. This is because Canada and Mexico have a significant reliance on oil exports. When oil prices rise, the revenues of oil-exporting countries increase, improving their terms of trade and strengthening their currencies. As a result, the pairs may fall as CAD or MXN appreciate versus the US dollar. The opposite can occur if crude prices fall.  

USD/CNH 

Both currency pairs prominently feature the US Dollar (USD). This shared presence means that movements in USD can have a significant impact on both pairs. For example, if the USD strengthens due to factors like rising US interest rates or positive economic data, it can lead to a simultaneous appreciation of USD in both the USD/MXN and USD/CNH pairs. 

Negative Correlations 

GBP/MXN

USD often plays a leading role in global risk aversion. When investors flock to the USD as a safe haven, it can strengthen against other currencies, including the GBP. This, in turn, can weaken the GBP relative to the MXN, contributing to the negative correlation. 

Mexico’s export-oriented economy relies heavily on commodities like oil. When commodity prices decline due to a global economic slowdown, MXN can strengthen relative to GBP, which is less directly tied to commodities. This adds another layer to the negative correlation between USD/MXN and GBP/MXN. 

How to Trade USD/MXN

USD/MXN is a popular currency pair for forex traders due to its relatively potential high volatility compared to other pairs. Here’s an overview of how you can trade USD/MXN: 

Trade USD/MXN Using Fundamental Analysis

This type of research involves analysing economic factors that influence USD and MXN. These can be interest rates, inflation, economic growth and geopolitical events. Analysing central bank policies by the Fed and Banxico is crucial, as they decide monetary policies that can significantly impact the exchange rate. 

By focusing on economic news and events, you can use fundamental analysis to trade USD/MXN. The key is to identify how these events might influence the relative strength of the US and Mexican economies. 

Other factors like OPEC decisions can cause volatility. Falling oil prices may represent a challenge for Mexico, as an oil exporter. Traders could buy USD/MXN in anticipation that the peso will depreciate and lose value. 

Trade USD/MXN Using Technical Analysis

 Technical analysis involves studying historical price charts and technical indicators to identify potential trading opportunities. It focuses on charts patterns, trends and support and resistance indicators to identify potential buying and selling points. 

Popular indicators you can use to trade USD/MXN include:

• Moving Averages (MA): These smooth out price movements to reveal underlying trends. Common MAs include the 50-day, 100-day and 200-day moving averages. A price consistently trading above its moving averages suggests an uptrend, while trading below suggests a downtrend. 

• Relative Strength Index (RSI): This is a momentum oscillator, that moves between 0 and 100. It is used to measure whether the currency pair is overbought (above 70) or oversold (below 30). Traders might look to buy near oversold zones, anticipating a reversal, or sell near overbought zones. Traders can also use this indicator to check divergences between the RSI and price. 

• Fibonacci Retracement: Retracement levels are horizontal lines that indicate potential support and resistance levels based on the Fibonacci sequence.  Traders use these levels as support and resistance to identify areas where the price might reverse direction during a retracement within a larger trend.
  

It’s important to remember that technical analysis doesn’t predict the future with certainty, but it can be a valuable tool for identifying trading opportunities.

Risk Management 

Effective risk management is important when trading USD/MXN. The foreign exchange market is inherently volatile and trading MXN has historically been known for sharp price moves.  Even well-tested strategies can be disrupted by predicted and unforeseen events. Here’s why risk management is important: 

• Using stop-loss orders mean you predetermine the maximum amount you’re willing to lose, so you can limit your potential drawdown. This helps prevent emotional decisions and protects your capital from disastrous losses, especially during periods of sharp volatility. 

• A well-defined risk management plan enforces trading discipline. This is a critical skill in trading and prevents impulsive decisions based on greed or fear.

• Effective position sizing limits the amount you allocate per trade. This may safeguard your trading pot and allow you to participate in the market over the long term. One large, unmanaged loss can significantly impact your ability to capitalise on future trades and may force you to stop trading. 

USD/MXN Trading Strategies

There are many different types of strategies that traders use to take advantage of price movements. From short-term stochastics to long-term buy and hold, sentiment to deep fundamental analysis, traders must choose a strategy that suits them and gives them a trading edge. That might depend on your risk tolerance, time horizon, personality and trading style. 

What it means to go long USD/MXN

When you go long USD/MXN, you are essentially buying USD with the expectation that its value will increase relative to MXN. 

If USD appreciates against MXN, you can sell your USD at a higher price later to make a profit.

What it means to short USD/MXN

On the flip side, going short USD/MXN means you are selling US dollars with the expectation that their value will fall compared to MXN. 

If USD depreciates versus MXN, you can repurchase USD at a lower price to pocket the difference as profit. 

Understanding these basic concepts is essential for deciding on a trading strategy for USD/MXN. 

Day Trading

This strategy involves buying and selling positions within the same trading day, capitalising on short-term price movements. A trader will never hold overnight positions. Day traders often rely heavily on technical analysis to identify multiple entry and exit points. 

Position Trading

This approach takes a longer-term perspective, holding positions for an extended period. Position traders focus on fundamental analysis to identify long-term trends.

Swing Trading

Swing traders typically hold positions for several days or weeks, aiming to capture profits from larger price “swings”. They primarily utilise technical analysis as their trading strategy. 

Explore our article on ‘position trading vs swing trading’ to help you determine which strategy is more suitable for you.

Sentiment Trading

This strategy involves assessing market sentiment towards USD and MXN to determine what and when to buy or sell. Investor psychology can play a huge part in price action.  

News Trading

This approach focuses on exploiting market reactions to major news events affecting the USD or MXN. News traders require exceptionally fast execution to take advantage of market movements that take place in the blink of an eye. 

Best Time to Trade USD/MXN

The foreign exchange market, unlike traditional stock exchanges, is open continuously 24 hours a day, 5 days a week. This means traders from across the globe can benefit from forex trading hours. 

For USD/MXN specifically, here are generally the best conditions:

• Europe – US session Overlap (12pm to 4pm GMT)

When the London trading session overlaps with New York, overall market liquidity (the ease with which currencies can be bought and sold) is high. This often translates to higher trading volume and potentially greater price swings in USD/MXN. This period can also coincide with the release of key economic data from these regions, further fuelling volatility. 

• End of US session (8pm to 10pm GMT)

Trading in USD/MXN can also be active at the end of the day with daily closing prices important for investors when closing their books. 

Choosing what time is best can often depend on your trading strategy and your personal circumstances.

Final Thoughts

In conclusion, trading the USD/MXN currency pair offers unique opportunities and challenges due to its volatility and liquidity. By understanding the historical context, key influencing factors, and effective trading strategies, traders can better navigate this dynamic market. Whether using fundamental or technical analysis, proper risk management is essential for success in trading this exotic currency pair.

Trading USD/MXN with Tight Spreads via CFDs at Vantage

Trading USD/MXN can offer different trading opportunities to other currency pairs. Higher volatility can be appealing to some traders, who use prudent risk management techniques and are comfortable with sharp price movements. 

Vantage offers competitive spreads on a wide array of major currency pairs and minor currency pairs.

If you want to practise different trading strategies, you can test your trading skills without risking real capital by taking advantage of our free demo trading account. 

Embark on your USD/MXN trading journey via CFDs today! 

FAQs for USD/MXN Trading

What is the Spread on USD/MXN at Vantage?

At Vantage, we offer competitive spreads on USD/MXN. Due to the potential higher volatility, these spreads can often be wider than the more traditional currency majors. 

Is USD/MXN a Good Pair to Trade?

USD/MXN is considered relatively liquid, meaning there’s usually enough trading volume to execute orders without significant slippage. It can often react sharply to numerous different factors like geopolitical or commodity news. Political events between the US and Mexico can also cause volatility which traders may be able to potentially benefit from, depending on market conditions. 

What are the Risks of Trading USD/MXN?

Trading USD/MXN can carry risks due to its volatility, driven by geopolitical events, market sentiment and economic data. Unforeseen events especially, might expose traders to potential losses. 

Leverage amplifies both profits and losses, while liquidity risk during low trading volume can impact trade execution. Effective risk management, including using stop-loss orders and correctly sized positions, is crucial for mitigating these risks.

What is the Best Time to Trade USD/MXN?

The best time to trade USD/MXN is typically during the overlap of the European and US sessions, as well as towards the end of the American session.

During these periods, traders can capitalise on accessing multiple markets simultaneously and have ample time to analyse and react to major economic data releases.

References