USD/MXN: The Donald Trump trade
Forex markets often act as a good political barometer and right now a particularly interesting one has developed around US Presidential candidate Donald Trump and the Mexican Peso (MXN), which tends to sink whenever the real estate tycoon’s popularity rises
After a brief wobble in the polls, Trump, widely considered a maverick candidate, is now once again running neck-and-neck with establishment candidate Hillary Clinton who seems to have been hobbled recently by health problems.
Last week, MXN came within a whisker of the psychology important USD/MXN 20.00 level – and should Trump start to take a serious lead in the polls that level is likely to be shattered. A double whammy could come from the US Federal Reserve finally raising interest rates in December.
The reason for the Trump-MXN relationship is because Trump singled out Mexico as an exporter of criminals, a source of uncontrolled immigration and a destroyer of US jobs and has even vowed to build a wall between the two countries. The Trump-MXN relationship emerged after Republican rival Ted Cruz dropped out of the race in May.
So far this year, MXN is down over 12% against USD and about 33% over two years ago.
Mexico sends 80% of its exports to the US, has 30% of its debt in USD and is impacted by moves in oil prices. The fear is that Mexico would bear the brunt of trade protectionism should Trump become president after the Nov 8, 2016 elections. For instance, Trump has promised to re-write the North American Free Trade Agreement if he gets into power.
In the meantime, there’s widespread talk of Mexico raising interest rates and even selling USD to protect MXN. The Mexican currency has responded positively in the past to rate rises. However, as MXN has emerged as a trade on Trump’s popularity, interest rate rises and intervention may not be enough to stem the currency’s decline.
Though a Trump victory, or the strong likelihood of one, could see a savage sell of MXN, once in power he may find himself constrained on many of his election promises. Mexico is deeply embedded in US automotive supply chains and US big business is likely to lobby hard against trade protectionism and even the much vaunted border wall might prove impractical to build. In other words, MXN would likely see some form of recovery as reality sinks in.
A Clinton resurgence on the other hand could see MXN surge as shorts are forced to cover. After all many people still don’t really believe Trump will become President – even though the world has entered a new era where the impossible seems to happen. Just ask voters in the UK who against all expectations decided to leave the EU.
TECHNICAL ANALYSIS: USD/MXN: Gearing up for another sell-off
USD/MXN is at its highest in at least a decade and so far, the dynamics favour further gains for USD, particularly if Presidential hopeful Donald Trump can continue to improve his poll rankings.
It now hinges on whether, USD/MXN can clear the psychologically important 20.00 level – if it does it could be a fairly clear run to 21.00 and even 22.00 over a period of four to six weeks.
For the time being the pair have entered a shallow consolidation pattern, which looks like a staging post for another run on the upside. If it is to make a convincing move upwards, from a technical perspective, it would help for the daily RSI to pull back from over-bought territory and for the Bollinger bands to narrow. Significant volatility drops are often a precursor to strong break-outs.
Among the key support levels for this consolidation pattern are 19.6145 and 19.4652. Any lower and doubts will emerge over whether the trend that got started in May is starting to lose momentum. Below that support levels of 19.3674, 18.2788 and 18.1822 are important.
The two big dynamics driving USD/MXN over the next 42 days (from this Monday) until the US election are the fortunes of the two US Presidential candidates and whether the Central Bank of Mexico will support MXN by buying its currency or raising interest rate rises. A less important dynamic are oil prices and unless they move dramatically they’re unlikely to interfere much with the first two drivers.
By Justin Pugsley, Markets Analyst, MahiFX