Yesterday, USD/MXN had its biggest drop in over 5 years after the Mexican Central Bank (Banxico) surprised the market with a 50 basis point rate hike on the overnight rate to 3.75%. The unexpected rate hike was also accompanied with Mexico’s Finance Minister Videgaray’s announcement of spending cuts of 132.3 billion pesos, or 0.7% of GDP in 2016. 100 billion pesos of the cut will come from state-owned Petroleos Mexicanos and will require their board’s approval.
The central bank also announced that they will suspend the dollar sale mechanism and intervene in the FX market, when necessary. The bank clarified that this is not the beginning of an interest rate hiking cycle.
Price action on the USD/MXN daily chart shows that price formed a bearish ABCD pattern last Thursday. Point C was confirmed just ahead of the 50.0% Fibonacci retracement of the A to B leg, while Point D was confirmed with the 161.8% Fibonacci expansion level of the B to C move. The bearish drop accelerated after the coordinated announcement of a surprise rate hike and spending cuts. Price may target the 50-day SMA, which currently trades at 17.9221. Major support may come from the 17.5000 level.
Critical resistance remains the psychological 18.5000 level. A daily close above here, could see further bullishness target 19.2800.
The trade: SELL USD/MXN at 18.5000, with a stop loss at 18.7500 and take profit at 18.0000. The risk/reward ratio is 1:2