USD/MXN

The USD/MXN currency pairing measures the value of the Mexican peso in comparison to the US dollar.

While the two countries may be geographically and economically close, the popularity of their respective currencies is vastly different and the pairing is not one of the most commonly traded in forex markets.

The peso is considered to be an emerging market currency and has significant links to oil prices, meaning it can often be extremely volatile.

As mentioned earlier, the close economic ties between Mexico and the US are evident in USD/MXN trading. However, the pairing does not necessarily behave in a traditional manner and this can sometimes catch traders out.

For example, while a strong US economy will help to boost prospects in Mexico, there is likely to be something of a chilling effect if the peso strengthens too much versus the greenback.

This is because items produced domestically begin to lose the pricing edge they have over imports from other countries, dampening demand and hampering further economic growth.

Unlike a number of other countries, Mexico is not considered to be a currency manipulator and has not demonstrated any obvious desire to interfere with the relative strength of the peso.

However, the USD/MXN pairing was impacted in the 1990s when Mexico entered into the North American Free Trade Agreement with the US and Canada. After initially looking overvalued, the currency declined sharply on several occasions before stabilising against the dollar.

As a result, it is oil prices that generally tend to have the most significant impact on USD/MXN and those investing in the pairing should monitor data releases such as the Energy Information Administration's weekly US inventories report, which is key to West Texas Intermediate crude oil prices.