Chart Of The Day: Will NAFTA Negotiations End Peso's Growth?
Investing.com | Aug 15, 2017 10:01AM ET
By Pinchas Cohen
Yesterday, we provided analysis and trading strategies of the loonie versus the dollar, leading up to Wednesday’s NAFTA negotiations. Today, we provide analysis and trading strategies of the remaining partner’s currency, the Mexican peso.
An End To NAFTA Means An End To Mexican Growth
Since the end of last year, Mexico has become the second largest exporter to the US, after China, putting the country at a disadvantage at the negotiation table as it is now highly dependent on trade with the US.
Additionally, the trade agreement reduced Mexico’s trade deficit. Since NAFTA was originally signed, foreign investments rose to billions of dollars a year. In fact, Mexico has become a more attractive destination for foreign investments, after the average manufacturing salary was reduced to $2.10 compared to China's $3.60 in 2016.
The bottom line is that an end to the agreement may end a period of growth for Mexico. The country’s finance minister recently said that the opening of the agreement induces considerable uncertainty into Mexico’s economy.
Peso Makes Unprecedented Rise Following Worst Fall Since 2008
After 2016’s 28 percent rise of the dollar versus the Mexican peso – its fastest climb since the 2008 crash, when it rose 58 percent in 18 months – the dollar fell 15 percent year-to-date and 20 percent since the January 11 high, in its fastest fall on record.
There are three main reasons for the peso’s worst fall since 2008.
First, the Mexican peso suffered greatly due to Trump. On the campaign trail, Trump beat it down with aggressive rhetoric, promising to tear up the NAFTA agreement and build a wall that Mexico would pay for. The Mexican peso became the de facto Trump trade during probably the most tumultuous campaign in all time.
Second, as the most liquid of all emerging assets currencies, the peso has become everyone’s favorite chew-toy, or asset to short on a hedge to represent emerging markets. Its liquidity stems from the fact that Mexico is the world’s 9th biggest oil exporter, which means countries buy its currency to pay for its oil. Additionally, Mexico is the second-latest trading partner with the US, and the many transactions between the two countries include an active black market of immigrants and drug traffickers. This adds another layer to the currency exchange and greatly increases the peso's liquidity.
Because of this emerging-market currency liquidity, investors shorted the peso at every market uncertainty last year. That means that before the currency was able to recover from the previous short, it got rained down by shorts again. As an example, before the Brexit vote, the peso developed a positive correlation with the pound, regardless of any impact Brexit may have had on the Mexican economy. It simply turned into a hedging tool to protect against the potential of the British voting “yes” to a Brexit.
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Third, when the price of oil dropped 24-percent between June 9 and August 3, 2016, it meant that Mexican oil importers had to buy less peso, thereby contributing to the peso’s fall.
The peso has since achieved an unprecedented rise on two main reasons. The first reason is that it was due a substantial correction following its great fall. The second reason for the peso’s recent rise is the falling dollar.
It’s extremely complex to form a cohesive and clear fundamental outlook comparing the dollar and the peso. Despite the fact that the Fed would love to have Mexico’s growth, there is global demand for the dollar as the currency for commodities and reserve currency. In contrast, by Mexico’s Finance Minister’s own admission, a significant uncertainty infuses the Mexican economy entering into the NAFTA renegotiations.
The Technicals
The MACD just provided a buy signal – after reaching its lowest level on record – when the shorter moving average crossed over the longer one. The RSI provided a buy signal, after reaching its most oversold condition since 2013.
On the daily chart, the pair crossed above its downtrend of the year, putting its resumption in question. The RSI provided a second positive divergence. The first positive divergence occurred when the price peaks descended between June and July, while the RSI peaks rose. While the peaks continued their descent between July and August, the RSI peaks rose again.
The NAFTA negotiations are expected to have ups-and-downs, according to news, rumors and – of course – tweets.
The dollar may be due for a correction against the major currencies in general, and against the MXN in particular. The dollar’s rate of decline slowed down, as plotted with a less steep downtrend line (red), which just so happened to be hugged by the 50 dma (green).
Trading Strategies for a Long Position
Conservative traders should wait for a formal reversal, when two peaks-and-troughs are recorded going up.
Moderate traders may wait for price to overcome the 18.5 price level, where the July peak found resistance by the April trough.
Aggressive traders may go long, with the short-term July uptrend line, after crossing above the short-term downtrend line (red) since May and would be advised to wait on a close above 18.0650, the August 9th high.
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