Sombreros, tequila, airport jobs, Obrador and a spiky cactus up one’s butt. Trading USDMXN is NOT for the faint hearted

This pair has been the source of fantastic profit over the last year. However, the tide has turned and Mr Market is getting back what I’ve taken. I thought it would be good to write a post on the TA as well as the fundamentals to help me as well as others.

Let’s catch up with the facts to paint the picture of where we are. President elect Obrador (Amlo) is quite a leftist leader. The market really fears that he will walk down the same path as other countries in Latin America such as Argentina and Venezuela. The ratings agencies recently downgraded Mexico a notch, which doesn’t help. Arguments over certain clauses in the new NAFTA trade agreement (albeit Canadian led).  Stopping the $13billion Mexico City airport job via a very flimsy referendum really spooked the markets and added to the fears of investors. Also, the stopping of new acreage being put up for auction as well as investigating existing sales of acreage to international oil companies for reasons of corruption adds to the already jangling nerves.

Couple all the above with the US raising interest rates makes for a heady cocktail of woe for the beleaguered peso. Mexico has circa $510 billion in US debt which is approx. 48-50% of GDP. That’s a lot. Taking the above, we have all the reasons to sell the peso. Fairly compelling. Let’s look at some reasons to buy the peso.

Well, there is actually hope for Obrador to change things dramatically in Mexico. His biggest mantra in his election campaign was to tackle corruption. If, and it’s a big if, he gets anywhere near to achieving this then it will add a lot to the country’s GDP, and foreign investors will have renewed confidence.

Obrador came out late on Friday soothing the market fears that he will not be changing banking laws or changing economic/fiscal policy for the next 3 years. That eased worries a wee bit taking the pair from 20.40 to 20.03 in minutes. Mexico sits on a mahoosive amount of oil, much of it untapped. Pemex, the state owned oil giant has had little investment over the years and to fulfil the countries potential they have to encourage the super majors and others to invest in that sector. I believe he will need outside help to stem the decline in oil production and build new refineries which he wants.

He inherits a fundamentally strong base economy with projected growth of 2.3% in 2019.

The big plus for me is the speed in which the new USMCA was agreed by the Mexicans. This is only conjecture on my part, but I think the US is going to help tackle corruption and crime in a big way. It’s a scourge on Mexican society and it affects the US in a major way as well.

So, we have an overview of the fundamentals driving the currency. The negatives are reasonably priced in and positives not.

What do the charts say?

Being an emerging market ccy and its volatile the longer-term charts are the best ways to determine your trades. Let’s start with the weekly.

USDMXN weekly chart

Depending on how far back you go it’s underpinned. In Mar ’08 it was 9.8! On this chart we have the lows of 12.80 in May 2014 and the highs of 22.03 soon after Trump got into power in Dec 2016. I’ve put in a Fib on this and a couple of trend lines. As you can see the price action has respected these areas. It’s not enough to pin your hat on, nothing is but they are certainly areas to be respected. We are close to the upper trend line but it’s still in play. So that’s another area where one can take a short which is relatively low risk.

Let’s Look at the H4 chart to see shorter term trade set ups.

USDMXN H4 chart

I’ve drawn a fib line from the 18.47 low to the 20.47 high and as you can see, we have a defined top in place for now. A good area for shorts to be placed. We also have a good strong area defined for longs down below. The chart was showing incredible bullishness from the break of 19.20. 19.60/7 was a key area (the Turkish lira sell off spike) where the price action got knocked back. But, as you can see the airport pullback caused the price to thunder up to highs of 20.47. The price action then quite quickly retraced down to 19.57. My gut feeling is that this was pushed a little towards a decent sized option strike on that day. No proof though. As we can see the price was worked up testing the recent highs of 20.40 before Obrador came out and soothed the markets. This has helped solidify a top. You could suggest a double top in play? Well, it’s certainly worth considering.

The 1H chart shows how the price was supported on the way up (the blue lines) I put a fib in there again but this time it’s not so much to gain from it in my opinion.

USDMXN H1 chart

I placed a trend line in and the late action broke the line. It’s only minor but opening action on Sunday night will give it credence or not. The minor support broke at the 20.13/15 area.

With all the info given, what does one surmise from it all? For me, the risks are skewed to the upside with the Fed on a rate rise path which really puts the squeeze on MXN. Obrador is a real and palpable risk and one has to be wary of what he said late on Friday, but one can’t ignore it either as it moved the market.

With the outlines I’ve made, dip buying is the long-term play, if you can withstand the negative carry but in the short-term, shorts are always favourable and preferred due to the very rewarding carry. Entries are so key when trading these volatile EM ccy’s. Get a good point of entry short then walking the PA down with a decent sized trail to protect your earnings would be prudent.

I’m short with a medium sized position and am looking to add to it further up if we get there. My disaster stop is up around 22.10 above the all-time highs. The trouble is I have to ride through a fair bit of pain in between. Although the carry is jolly good, my timing of the trade was pretty damn woeful. I have jobbed around it do good success which has paid for the current position. However, it’s not the best trading mantra is it! The charts and price action are all rear-view mirror and we just don’t know what is coming to turn the market. What we can do moving forward is take calculated risks rather than just diving in thinking we’re George Soros!!


David Terrell

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