How to Trade USD/MXN: A Complete Guide for Forex Traders

Economic

Summary:

Learn how to trade USD/MXN effectively with tips on technical and fundamental analysis, strategies, and risk management. Maximize your trading success with expert insights.

The USD/MXN currency pair, representing the U.S. Dollar against the Mexican Peso, is a popular choice among forex traders due to its liquidity, volatility, and the close economic relationship between the two nations. Whether you're an experienced forex trader or a beginner, understanding how to trade USD/MXN effectively requires an understanding of both technical and fundamental analysis, along with a solid grasp of the factors that influence the exchange rate.

In this guide, we will walk you through the basics of trading USD/MXN, the key factors to consider, popular trading strategies, and tips for managing risk when trading this currency pair.

Understanding USD/MXN

The USD/MXN pair is categorized as a "minor" currency pair in forex trading. It is not as widely traded as major pairs like EUR/USD or GBP/USD but still offers significant opportunities due to its volatility and the economic influence of both the United States and Mexico. The exchange rate indicates how much the Mexican Peso (MXN) is worth in U.S. Dollars (USD). For example, if the USD/MXN exchange rate is 20.00, it means 1 USD is equivalent to 20 Mexican Pesos.

This pair’s volatility can offer high potential returns, but it also presents risks. The USD/MXN is known for reacting sharply to geopolitical events, economic releases, and changes in market sentiment, particularly those involving the U.S. and Mexico.

Factors Influencing USD/MXN

Before you begin trading USD/MXN, it’s crucial to understand the factors that impact the exchange rate between the U.S. Dollar and the Mexican Peso:

1. Economic Indicators

Economic data from both countries plays a significant role in influencing the USD/MXN exchange rate. Key reports to keep an eye on include:

U.S. Economic Data: The U.S. is the world’s largest economy, and economic data like GDP growth, inflation (CPI), unemployment figures, and Federal Reserve interest rate decisions can cause significant movements in USD/MXN.

Mexican Economic Data: Mexico’s economic indicators, such as GDP growth, inflation (IPC), and trade balance, also affect the value of the Mexican Peso. Moreover, Mexico’s dependence on U.S. exports makes it highly sensitive to changes in U.S. economic conditions.

2. Interest Rates and Central Bank Policies

Interest rates set by the U.S. Federal Reserve (Fed) and Mexico’s central bank, Banco de México (Banxico), are key drivers of the USD/MXN exchange rate. Generally, higher interest rates in the U.S. will attract capital flows into USD-denominated assets, strengthening the U.S. Dollar against the Peso. Conversely, when Banxico raises interest rates, it can support the value of the Mexican Peso.

3. Trade Relations and NAFTA/USMCA

The economic relationship between the U.S. and Mexico is influenced heavily by trade agreements. The North American Free Trade Agreement (NAFTA), which has since been replaced by the U.S.-Mexico-Canada Agreement (USMCA), has a significant impact on the USD/MXN rate. Any changes or tensions in trade relations, such as tariffs or political tensions, can cause fluctuations in the exchange rate.

4. Oil Prices

Mexico is a major oil producer, and its economy is closely linked to the price of crude oil. When oil prices rise, the Mexican Peso often strengthens as Mexico’s export revenues increase. Conversely, when oil prices fall, the Peso may weaken, making the USD/MXN pair more attractive to traders.

5. Geopolitical Events and Sentiment

Like all forex pairs, geopolitical events—such as elections, trade wars, or natural disasters—can impact the value of USD/MXN. Political instability in either country can cause sudden price movements. Traders need to stay informed about developments in both the U.S. and Mexico to anticipate potential shifts in sentiment.

How to Trade USD/MXN

Now that we understand the factors driving the USD/MXN exchange rate, let’s look at some practical tips on how to trade this currency pair.

1. Technical Analysis

Technical analysis involves using historical price data and chart patterns to predict future price movements. For USD/MXN, some popular technical analysis tools include:

Support and Resistance Levels: Identifying key support and resistance levels is vital when trading USD/MXN. These levels help traders understand where price action may reverse or stall.

Moving Averages: Moving averages (e.g., the 50-day and 200-day moving averages) can help identify trends in USD/MXN and smooth out short-term price fluctuations.

Relative Strength Index (RSI): The RSI helps determine whether USD/MXN is overbought or oversold, which can signal potential reversals.

Candlestick Patterns: Candlestick patterns, such as doji, engulfing, and hammer, can provide clues about market sentiment and potential price direction.

2. Fundamental Analysis

Fundamental analysis focuses on understanding the economic and political factors that affect the exchange rate. Traders should monitor U.S. and Mexican economic indicators, as well as news related to oil prices and trade relations. Major news releases, such as the U.S. Non-Farm Payrolls or Banxico’s interest rate decisions, can cause sharp movements in USD/MXN.

3. Trading Strategies for USD/MXN

Several trading strategies can be applied to the USD/MXN pair, depending on your risk tolerance and trading style:

Swing Trading: Swing traders look for price swings in the USD/MXN market and hold positions for several days or weeks. This strategy is ideal for traders who can analyze both technical and fundamental factors.

Day Trading: Day traders take advantage of intraday volatility, opening and closing trades within the same day. Given the volatility of USD/MXN, day trading can be profitable if done correctly, but it also requires a keen eye for market trends and quick decision-making.

Scalping: Scalping is a high-speed, short-term strategy where traders take small profits from quick trades. Since USD/MXN tends to be volatile, scalpers can profit from small fluctuations in price.

Position Trading: Position traders take long-term positions in USD/MXN based on broader economic trends. This strategy requires patience and a deep understanding of macroeconomic factors affecting the U.S. and Mexico.

4. Risk Management

Effective risk management is essential when trading USD/MXN, especially due to the currency pair’s volatility. Consider implementing the following:

Stop-Loss Orders: Always set stop-loss orders to limit potential losses on each trade. This is crucial in a market where price swings can happen rapidly.

Position Sizing: Properly sizing your positions helps prevent excessive risk exposure. Avoid risking more than 2% of your trading capital on any single trade.

Diversification: Diversifying your portfolio across different assets can help reduce risk exposure and prevent significant losses in case of a sudden move in USD/MXN.

Conclusion

Trading USD/MXN can be profitable if approached with the right strategy, risk management, and market knowledge. By understanding the key factors influencing the U.S. Dollar and Mexican Peso, applying both technical and fundamental analysis, and managing your risk appropriately, you can trade this volatile currency pair with greater confidence.

Whether you’re a novice trader or an experienced investor, USD/MXN offers a wealth of opportunities in the forex market. Stay informed about economic indicators, monitor geopolitical developments, and adjust your trading strategy based on market conditions to maximize your potential for success.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Alex

Economic

China’s commerce ministry has proposed new export restrictions on technology used in producing battery components and processing critical minerals such as lithium and gallium, reported Reuters.

If implemented, these measures would continue China’s series of export restrictions on critical minerals and related technologies, where it holds a significant global position.

The restrictions could also impact the global expansion plans of Chinese battery giants such as CATL, Gotion, and EVE Energy.

The announcement does not specify when these changes might take effect but the public can comment on the proposal until 1 February 2025.

In December 2023, China banned exporting technology crucial for extracting and separating rare earth elements to maintain its dominance in this sector.

Rare earths are essential for producing magnets used in EVs, wind turbines, and various electronics.

According to the International Energy Agency (IEA), China accounts for about 80% of natural graphite and 60% of mined magnet rare earths.

China’s dominance in global supply chains is largely due to its extensive refining and processing capabilities.

The demand for these minerals is driven by advanced technology and renewable energy needs.

China’s increasing control, both domestically and internationally, in regions such as Africa, raises concerns about reduced access for Western nations and mining companies.

These developments follow the Biden administration’s trade investigation into Chinese-made “legacy” semiconductors, potentially leading to more US tariffs on Chinese chips used in everyday products.

The proposal comes ahead of US president elect Donald Trump’s second-term inauguration later in January 2025, during which he is anticipated to implement tariffs and trade restrictions, particularly targeting China.

The “Section 301” probe, launched few weeks before Trump’s inauguration on 20 January 2025, will be handed over to his administration for completion.

This could enable Trump to impose the 60% tariffs he has threatened on Chinese imports.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Justin

Central Bank

Reserves at Fed Sink Below $3 Trillion to the Lowest Since 2020_1

Bank reserves fell by about $326 billion in the week through Jan. 1 to $2.89 trillion, according to Fed data released on Thursday. That’s the largest weekly slide in over two-and—a-half years.

The decline comes as year-end dynamics force banks to pare balance-sheet intensive activities like repurchase agreement transactions in order to shore up their books for regulatory purposes. That means cash is directed to places like the central bank’s overnight reverse repo facility, draining liquidity from other liabilities on the Fed’s ledger. Balances at RRP swelled by $375 billion between Dec. 20 and Dec. 31 before falling by $234 billion on Thursday.

As the same time, the Fed has also been removing excess cash from the financial system through its quantitative tightening program, just as institutions continue to repay loans from the Bank Term Funding Program.

With US policymakers continuing QT, Wall Street strategists have been paying close attention to the lowest comfortable level of reserves — which some have estimated between $3 trillion and $3.25 trillion, including a buffer. Policymakers said at last month’s gathering it was continuing to shrink its balance sheet.

It also adjusted the offering rate on the RRP facility so that it’s in line with the bottom of the target range for the fed funds rate. That put downward pressure on short-term interest rates and some think that it could be enough to stave off reserve scarcity for a little bit longer.

Still, the debate is picking up over how much longer the Fed can keep up QT without evoking memories of September 2019. At the time, reserves had grown too scarce while the Fed was unwinding its balance sheet and a shortage led to a surge in a key lending rate and the federal funds rate. The central bank was forced to intervene to stabilize the market.

While the central bank in June lowered the cap for how much in Treasuries it will allow to mature without being reinvested, it’s unclear when the program will end altogether.

The recent reinstatement of the debt ceiling is likely going to make it more difficult for policymakers to judge that ideal level as the measures Treasury will take to remain under the cap tend to artificially add liquidity to the financial system and mask indicators of reserve scarcity. Two-thirds of respondents to the New York Fed’s Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants expect QT to end in the first or second quarter of 2025.

Source:Bloomberg News

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Alex

Forex

Economic

Pound to Dollar Rate 2025 Outlook: All Eyes on Washington_1

There is a consensus that US policies will help keep the dollar firm early in 2025.

The domestic and global consequences of Trump’s policies will be a key GBP/USD element this year.

On the US side, UBS is not convinced that economic strength will be sustained and expects GBP/USD gains; “For growth, we see downside to that number given the expected decrease in government consumption and as elevated real rates weigh on gross fixed capital formation. So the two cuts the market is pricing for 2025 may prove too few.”

It is one of the few bullish investment banks and forecasts that GBP/USD will strengthen to 1.34 at the end of 2024.

ING sees scope for initial Pound resilience, but expects a more aggressive Bank of England policy will weaken the Pound later in the year with GBP/USD ending the year at 1.24.

Danske Bank expects sustained dollar support during the year with GBP/USD ending the year at 1.22.

There is a high degree of uncertainty, especially surrounding the impact of US Administration policies under President Trump.

UBS notes the risk of elevated volatility and more extreme developments; “US President-elect Trump’s stated aim of aggressively taxing US consumers via tariffs is an example. Markets are not pricing in the inflation and growth consequences of policy pledges becoming reality, and assume dilution. The shift in immigration policy from Trump’s advisor Musk can be cited as a parallel—economic reality tempering political rhetoric.”

There are also multiple geo-political uncertainties including the Russia/Ukraine developments and the Middle East while the Chinese outlook remains a key global uncertainty.

UBS added; “Investors’ assumption that economic reality will limit political extremes is evident elsewhere— China and Germany, for example. As polarization reduces the middle ground, it is inevitable that markets have to pick a side rather than a compromise. But if markets pick the wrong side, the economic fallout will be more dramatic.”

The imposition of US tariffs and the reaction, especially for China, could trigger global currency wars and a slide in risk appetite, both of which would have major implications for the Pound.

In this context, investment bank projections for major currencies are relatively narrow and there will be an important risk of much more substantial moves during the year.

ING expects near-term Pound resilience; “The steady increase in US trade tariffs through 2025 stands to weigh on the currencies of the smaller, open economies and the commodity producers. The outperformers in the G10 space (within a broadly stronger dollar environment) will be the undervalued Japanese yen and – for the first quarter – probably sterling, too.”

Bank of England (BoE) policies will also be very important for the Pound.

There is a consensus that the BoE will cut rates at the February meeting. Markets are, however, only pricing in two full cuts for the year.

ING expects the BoE will shift to a more aggressive stance later in the year; “We think that softer UK services data will not emerge until February, suggesting GBP/USD may hold onto gains until then. But ING’s house view is for quite aggressive BoE rate cuts in 2025 – taking the policy rate 150bp lower to 3.25%. Hence our view for some modest GBP/USD downside later next year.”

Guillaume Derrien, senior eurozone economist at BNP Paribas is cautious over the UK outlook, “Although the UK economy is facing significant wage pressures, economic activity is significantly less dynamic than in the US.”

MUFG added; "If we were to see the economy in the UK continue to weaken early this year, and the Bank of England started to make noises about potentially being more active in terms of cutting rates in response to that, that could certainly open the door for a weaker pound.”

Derrien added; “Between an ECB whose rate cuts will, admittedly, be gradual but steady, and a US Federal Reserve that is now more hawkish, the Bank of England will be in an intermediate position in 2025, with four rate cuts expected.”

In its December 2024, statement, the Bank of England made reference to uncertainties and vulnerabilities surrounding tariffs and the global economy.

It commented; “Indicators of trade policy uncertainty had increased materially, but that the magnitude and the direction of the impact of any such policies on UK inflation was at present unclear. These effects might not be apparent for some time.”

US Administration policies will be a key short-term focus with expectations of tax cuts and tariffs.

MUFG examined the historical context; “The price action for the dollar index has been similar so far to following the first US election victory for Donald Trump at the end of 2016 when it also increased by just over 5%. On that occasion the dollar index peaked right at the start of Trump’s first year in power on 3rd January 2017 before trending lower throughout the first nine months of the year.”

The bank does not expect a repeat of the 2017 price action.

It notes that the global economy strengthened in 2017 which helped underpin global currencies. MUFG, however, does not expect a repeat this time round with the global economy generally struggling and preventing currencies making headway.

MUFG also expects that the Trump Administration will be much more proactive in imposing tariffs.

It commented; “While we don’t expect 25% tariffs to imposed on all goods imported from Canada and Mexico, it is likely that tariffs will be hiked by a further 10% on imports from China. More front-loaded tariff hikes support our forecast for the US dollar to strengthen further during the first half of this year.

RBC expects a more moderate stance; “A very heavy hand on tariffs right off the bat would certainly be U.S. dollar positive, but we expect a more conciliatory tone, in the way that those tariffs are implemented in perhaps a more staged way in order to extract as much as possible in negotiations with trading partners.”

There will certainly be concerns that tariffs will undermine global economies.

Upward pressure on domestic prices would also encourage the Federal Reserve to maintain a hawkish stance and resist further interest rate cuts, at least in the short term.

The Fed cut interest rates to 4.50% in December, but there was a hawkish statement. Markets are not expecting a further cut in January and only pricing in two cuts for the year.

MUFG also expects the hawkish Federal Reserve policy stance will underpin the US currency.

RBC Capital Markets differentiates between different time frames; “We've pushed back our expectation for when that U.S. dollar weakness might materialize. But we do expect the U.S. dollar to weaken in the longer term, because a lot of the factors that we monitor still argue in that direction. You've got the U.S. dollar, that is still very overvalued on most models.”

The bank pointed out long-term structural negative factors for the US currency; “We have U.S. trade and fiscal deficits that are quite large and expected to continue for the foreseeable future. And we've got countries starting to shift away from using the U.S. dollar.”

Scotiabank still expects GBP/USD to be held to 1.24 at the end of 2025 before gains in 2026.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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ING

Economic

THINK Ahead in developed markets

The first jobs report of the year comes next Friday (January 10). The early consensus is for December non-farm payrolls to have risen 153k with a range of 125k to 200k, but expectations will be firmed up through the week with the release of job openings numbers, ADP private payrolls and the ISM employment components. The unemployment rate is expected to hold at 4.2%, while wage growth is expected to hold at 4% year-on-year. This would all be consistent with the general cooling of the jobs market, but after 100bp of Fed rate cuts in 2024, the widely held view is that we will see a much slower and less aggressive series of moves in 2025.

The Federal Reserve dot plot update from the December FOMC meeting suggested the central forecast amongst officials is for only two 25bp cuts in 2025. Just 3bp is priced for the 29 January FOMC meeting with 15bp priced by March. We certainly agree with a no-change outcome later this month but are still projecting a 25bp cut in March. While the Fed has been cutting the policy rate, longer-dated borrowing costs have surged higher on a combination of government debt sustainability concerns and potentially sticky inflation. The dramatic steepening of the yield curve is pushing mortgage rates and corporate borrowing costs sharply higher. The dollar has also risen to its strongest level in more than two years against key trading partners and these two factors will act as a brake on economic activity that the Fed may feel it needs to offset.

Source:ING

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Manufacturers in the UK have cut back output at the fastest rate in 11 months, compounding the gloomy picture for the British economy, according to a closely watched survey.

The purchasing managers’ index (PMI) for manufacturing fell in December to 47, down from 48 in November – its weakest reading since February. Any reading below 50 signals a contraction.

Sterling fell on foreign exchange markets after the news, underlining the challenge facing the Labour government, as it hopes for an economic upturn.

The pound was down almost 1% against the dollar by mid-afternoon in London, at $1.24 – the lowest since last April. The dollar has strengthened more broadly in recent weeks, ahead of Donald Trump’s arrival in the White House.

S&P Global Market Intelligence, the data company that compiles the PMI, blamed government policy for the manufacturing squeeze.

Rob Dobson, a director at S&P Global, said: “Manufacturers are facing an increasingly downbeat backdrop. Business sentiment is now at its lowest for two years, as the new government’s rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike.”

He added that small- and medium-sized companies were being hit hardest. The survey showed that staffing levels were being cut back at their fastest rate since February.

Businesses are facing higher tax bills from April, after the chancellor, Rachel Reeves, announced an increase in employers’ national insurance contributions (NICs) to fund public services.

The NICs increase, which is projected to raise £25bn by the end of this parliament, will coincide with a rise in the “national living wage” of almost 7%, to £12.21 an hour for those aged 21 and over.

“Some companies are acting now to restructure operations in advance of the rises in employer national insurance and minimum wage levels in 2025,” Dobson said.

Labour came to power at July’s general election promising to fix the foundations of the economy and produce the strongest sustained growth among G7 countries.

With little evidence of improvement, Keir Starmer has more recently switched the focus to improving living standards. In his new year message, the prime minister said voters would see “more cash in your pocket”.

The economy had already been expected to slow in the second half of last year, as the Bank of England kept interest rates high to tackle inflation. Uncertainty over the impact of Trump’s re-election is also likely to have compounded the pessimistic mood.

Revisions to gross domestic product figures published by the Office for National Statistics in late December showed the economy flatlined in the third quarter of 2024. The Bank expects GDP to have stagnated in the final three months of the year, too.

The combination of weak GDP and strong wage increases has sparked fears that the UK may be sliding into stagflation – weak economic growth and rapidly rising prices. This would present a tough challenge for policymakers.

The Bank’s nine-member monetary policy committee (MPC) reduced interest rates to 4.75% in November, with policymakers expected to monitor the impact of the NICs increase closely.

Business groups responded with dismay to Reeves’s budget package of tax increases – and some have called on Labour to water down plans for stronger workers’ rights.

The Confederation of British Industry said in December that the economy was “headed for the worst of all worlds”, projecting a “steep” decline in activity in the first quarter of this year.

To stay updated on all economic events of today, please check out our Economic calendar

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Justin

Central Bank

Forex

China Lets Yuan Weaken After Defending 7.3 Per Dollar for Weeks_1

The yuan breached the psychological milestone of 7.3 per dollar for the first time since late 2023, amid concerns over China’s economic struggles and a widening bond yield discount to the US. The move came even as the central bank maintained its support for the currency with its daily reference rate on Friday.

The break may signal that the People’s Bank of China is looking to accommodate mounting growth pressures through a weaker currency after holding it almost unchanged for more than two weeks. As a result of Beijing’s control, the yuan climbed to the highest since 2022 versus trading partners’ exchange rates — a move that may undermine the nation’s export competitiveness.

The break of 7.3 “in a way is inevitable with continued dollar strength and the relentless fall in domestic government bond yields,” said Wee Khoon Chong, senior APAC market strategist at BNY. “Risk for dollar-yuan remains on the upside.”

The onshore yuan slid as much as 0.3% to 7.3190 on Friday before paring the move. A drop past 7.3510 per dollar would take the currency to its weakest level since 2007.

The decline has hurt sentiment in other emerging markets, with the Taiwan dollar declining to the weakest level since 2016 and the won erasing earlier gains.

Chinese state banks had briefly stepped away from selling the dollar at around 7.3 in the afternoon, spurring investors to send the yuan weaker than that level, according to traders. The lenders resumed selling the greenback at around 7.31, said the traders, who asked not to be identified as the matter was private.

Looking ahead, China’s economic fundamentals point to further depreciation. Risk sentiment is so poor that the benchmark stock index just closed at the weakest level since September and sovereign yields hit fresh record lows. US President-elect Donald Trump had also threatened to impose tariffs on Chinese exports.

In November, the country already suffered the biggest outflow on record from its financial markets.

Adopting a rigid FX strategy by drawing a red line is controversial, as artificial stability in the market may lead to outbursts of volatility in the future. In August 2015, the PBOC’s surprise move to allow the yuan to weaken after holding it little changed at 6.2 for months led to massive capital outflows and a panic selloff of Chinese assets.

Strategists at BNP Paribas SA see the yuan falling to 7.45 by the end of 2025, while Nomura forecast in December the currency may drop to 7.6 in overseas trading by May. JPMorgan Chase & Co. expects the offshore yuan to weaken to 7.5 in the second quarter.

“Once 7.3 is gone, I doubt there are many speed bumps along the way,” said Mingze Wu, currency trader at Stonex Financial Pte Ltd. “It’s likely market is just a bit shell-shocked and wondering what to do — it’s like a dog finally caught its own tail.”

Still, the PBOC may not allow a rapid and disorderly decline as that may lead to financial instability. It can still use its fixing — which confines the currency’s trading onshore to a 2% range on either side — to guide expectations, after keeping it at levels stronger than 7.2 for months.

Other tools at PBOC’s disposal include mopping up yuan liquidity in offshore trading and direct intervention in the FX market.

“Going forward, a calibrated yuan adjustment is more likely than an abrupt change,” said Wei Liang Chang, a strategist with DBS Bank Ltd. “Policymakers would likely seek to keep yuan depreciation expectations in check to avoid denting Asian risk sentiment.”