USD/MXN Remains Brittle After Sharp Sell-Off

The USD/MXN continues to remain at an impasse, but when a currency bears the brunt of a recession, I would expect that it is a foregone conclusion that other currencies will follow suit. The Loonie stands out as being relatively unaffected by the global economic downturn, but this is not the case for all currencies.

It is common knowledge that the USD has been consolidating against most major currencies during this recent correction. By the time most investors realize that this is about to occur, it is often too late. Due to this, most of the downside risk associated with USD/MXN falls to a more bearish currency pair such as the Canadian Dollar.

However, you need to understand that this type of consolidation does not mean that the currency has lost all value and remains intact. In fact, the currency is much stronger than it has ever been before, so long as we use our trading skills and take advantage of leverage to help us get in and out of a bear market.

When we look at the historical trends of the Canadian Dollar, it should be apparent to anyone that it bears no resemblance to the USD when the latter suffers a severe sell-off. Despite the weakness of the USD, there are many signs that suggest that it is a good time to invest in the Canadian Dollar, even if it was just a few months ago.

One of the first reasons why the Loonie has made a strong recovery is due to the global economy going into a severe recession. With unemployment remaining at near all-time highs, the financial crisis has left many citizens wondering whether they will be able to pay their bills, or whether they will be forced to declare bankruptcy.

It is not easy to determine what people’s mindsets are at any given moment, but I can tell you from experience that most people are very pessimistic about their chances for paying their bills. This pessimism will be one of the primary factors that are driving the USD/CAD through the roof, which will drive the Loonie lower.

This is very important because the Loonie has been under tremendous pressure since early 2020, while the CAD has been steadily rising as our friends in Canada have held the line. Even so, the USD has been steadily declining during this time frame, so the Canadian currency has been holding its ground.

If the currency bears were correct, the USD would be dropping like a rock on the forex market at this point. There is no way that the Canadian government would let that happen, so the Loonie has remained strong and the CAD has kept the currency market open and profitable.

In fact, we don’t even have to guess as to why this type of co-relation between two currencies has never existed before. The point is that both the Canadian Dollar and the USD have been consistently weakening over the past few years.

The issue that the currency bears are going to have in the coming months is that they need to look to China for a way to rescue the market. You see, China needs to sell off much of their currency, which it is now doing at a staggering pace, but if the USD fails to recover, it will continue to fall until it reaches parity with the CAD.

As I discussed in a previous article, a strong relationship between two currencies is always a great thing for the whole market. This is why when a currency makes a recovery, it is a foregone conclusion that another currency will follow suit, especially if they have some sort of economic correlation.

The fact that the currency bears think they have a handle on the situation is unacceptable, so they must act now to protect their profits. The Chinese Yuan and the Canadian dollar are the currencies to watch as we enter into the beginning stages of recovery.