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Chart of the day: EURMXN

The Mexican Peso (MXN) has recorded the best YTD performance against the EUR of any major currencies and looks even more compelling than EURUSD, which is now sitting at the lowest level since 2017.

Last week, we’ve seen far worse-than-forecast German and Eurozone Industrial production at -6.8% and -4.1% respectively. The recent Euro-zone Manufacturing PMI figures are consistently below 50, with the February read due this coming Thursday, and it’s expected to deteriorate even further. Consider the economy is growing at a meager 1% (YoY) in Q4 2019, the slowest growth rate in six years.

On top of this, the European Commission on Thursday pointed out the uncertainty over the future partnership with the UK, as well as the new downside risks of the outbreak of the ‘2019-nCoV' coronavirus, which could cause knock-on effects on economic sentiment. The speculation of more ECB stimulus and political instability in German will continue to weigh on the euro.

Weak economic prospect and uncertainty aside, the key driver of the EUR remains the popularity of the carry trade, and the use of the EUR as a primary funding vehicle. It’s no surprise the EUR is under pressure in the carry, where traders short the low-yield currencies and long the higher-yielding ones, like Mexican Peso or other EM currencies.

USDMXN daily chart

EURMXN is clearly capped by the bearish 5-day EMA, with the RSI pushing lower into bearish territory. With the persisting low FX volatility on the floor, we expect this carry will continue. The question now is when to short, or to wait until after a modest short-covering rally. A break above the 5-day EMA or the resistance of 20.3311 might see the bulls come back.

A weak PMI print in Germany will only increase EUR selling, even if the EUR is grossly oversold.

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