USDMXN into elections and Nafta

Before any other consideration: This is not a trading recommendation but a reflection of own opinions, positioning  and certainly not a guarantee for future returns!
This is a longer term view and could take weeks to develop.

Daily discussions in our room (be welcome to try us out) about the MXN and how bad things are and could get worse and watching MXN getting hit, we started to look at what’s real and what’s speculative. We came to some kind of consensus today amongst a few of us and guess what? We’re starting to think a lot of pre-emptive MXN selling has gone through in waves lately. Call it USD void strength, election fear, Nafta fear, EM woes.

We realise a lot of water and tequila still has to flow under bridges. Trump could just walk out of Nafta, impose car tariffs to scare away BM, Merc out of Mexico and get US carmakers back home to hurt Mexico but haven’t we traded most of it yet? I was the first to raise the flag saying Canada will get a far better deal than Mexico and I stand with that statement but …

Looking at the big USDMXN picture we’re starting to see days where we fly, stall and then come back. And then we rinse and repeat. That’s what us traders capture our attention. And then there’s this election interview by Lopez Obrador (We call him Labrador in the room), the frontrunner for the July 1st elections, that doesn’t sound to bad after all.Being named an anti-establishment, anti-whatever names, all of a  sudden sounds pretty reasonable, pro business and ready to defend a Nafta agreement. Of course  who wouldn’t defend his bread and butter but what could have been a disaster for Mexico doesn’t necessarily have to be reading this.

A few of us have started to try embryotically (is that proper english?) shorts USDMXN.I actually sold a pinch at 20.49 today. We realise it is taking a big bet, so we keep things extremely small. Our thinking is: “let’s start to get involved incase the worst is over, knowing that possibly the worst is still to come.”

We’ve been looking at comfort and non-comfort levels and there’s what we came up with. USDMXN rallied on Nafta, Trump, lower oil and elections fears at the same time His Royal Orangeness (That is proper English I’m sure)came into play. We’ve hit 22 at the worst of the oil levels and highest fear for Mex’ economy. We assume that that is well beyond our pain level. So what is “acceptable”? Depending on each an other’s sensibilities, it’s reasonably 21.50. That’s far away from where we are now…. another 5% which is massive. But, at the same time thinking about EM currencies, is it really on stress and overshoots? We’ve seen TRY, ZAR and this MXN move several % in one day so we need to take this into account.

So what do we do? Trade micro sizes, build up a position, which will be the highest closest to our stress level as we think we won’t go beyond the ultimate. Some of us will go in between levels as each trader has his own sensibilities, trading levels, timeframes etc but the global idea is to build into any election stress(1st July) to see a massive buy the rumour, sell the fact scenario as the new government will positively surprise and the Nafta will go to the wire but not explode.

Levels from here: There’s 20.65 the daily high, above there we’re looking at 20.95 and 21.40s. We’re looking to scale in same tiny size on any more stress. Myself and a colleague have decided 22 would be the level where we can’t allow it to go above but equally if the plan works out and we can build it up to 21.50 there is a fair chance the market can turn around and revisit 19 and myself being an optimist I’m even looking at ultimately a revisit of a 17.90 level, which would be at least a 7 from current, at best a 10-15% move back from stress levels.
First signs I would imagine we’ve seen the worst would be a move back under 19.90, where I may start to add to shorts, depending on the timing.

Here’s a few pics for your viewing and a Mexican song to cheer us all up, it’s Karaoke Friday after all. Let us know your findings and any Mexican readers, let us know what we’re missing on the Mexican elections and trade implications if you think we’re to far from reality.
Have a great weekend all

USDMXN W1 08.06.2018

USDMXN D1 08.06.2018

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