Trump Sends Peso Loonie

 | Apr 27, 2017 06:56AM ET

A Trump NAFTA backtrack sees an aggressive rally in both the Mexican peso (MXN) and the Canadian dollar (CAD) during the Asia session.

It’s been a tough couple of days for America’s NAFTA partners, Mexico and Canada. Both had been feeling the pinch from lower oil prices before President Trump decided to slap a tariff on Canadian lumber. The picture got even muddier with President Trump’s announcement yesterday that he intended to withdraw from NAFTA and renegotiate. This saw both the CAD (the loonie in FX speak) and the MXN come under sustained pressure.

Most particularly the MXN dream run since late January looked in danger. The central bank intervened to sell USD/MXN above 22.0000 and since, the MXN had rallied all the way back to the 18.4500 regions. The peso had sunk from there back to 19.2950 as off last night with a 1+ % move lower alone yesterday as the U.S. administration tightened the screws.

USD/CAD has been threatening to break out of the topside of its last six months range as well, threatening a sustained break of the 1.3600 level as Mr. Trump said lumberjacks are not ok and then said NAFTA was becoming No-FTA.

This all came to an abrupt end this morning in Asia with a Trump volte-face after what must have been an interesting three-way phone call between the respective leaders of each country.

10:35 (US) White House: President Trump agrees to not terminate NAFTA at this time after conversations with Mexico’s Nieto and Canada’s Trudeau – All leaders agree to “enable renegotiation of NAFTA deal” at a later date. – Source TradeTheNews.com

One suspects the renegotiation will be more USFTA than NAFTA, but the effect was immediate, with both the MXN and CAD rallying 2300 points and 100 points respectively. USD/MXN was dropping from 19.2350 to 18.9950 and USD/CAD from 1.3650 to 1.3550 in about the length of time it has taken me to type this. (I use two fingers)

Both currencies will be clearly vulnerable to headlines going forward as they enter the “renegotiation.” The price action illustrates the market’s perception of how intrinsically linked economically, to the whims of the United States, the troublesome neighbours to the North and South are.

USD/MXN

The peso has been on a stellar run since mid-January as Trump-flation gave way to Trump-fatigue and noise about paying for a border wall faded.

Looking at the chart below all is not lost for the peso, however. Yesterday's USD/MXN rally stopped exactly at the 23.6% retracement level of the entire Jan-April move. Thus, 19.2950 becomes the first major resistance followed by the 200-day moving average at 19.6117.

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Support is clearly denoted by the double bottom formed this month at 18.4470. Behind this are the lows of the Trump election day at 18.1606 which shows just how impressive the peso rally has been.