- The greenback initially gapped lower to kick off the trading session on Monday, testing the 17 pesos level.
- That being said, we turned around to show signs of strength as we rallied toward the 200-Day EMA, which is an area that we have seen a lot of resistance over the last week or so.
- Because of this, it looks very likely that we will continue to see a lot of downward pressure in that area, so with this, I think we have to look at this through the prism of potential trend following coming back into the picture.
Interest Rate Differential
The Mexican peso is one of the few currencies out there that offers a massive interest rate that you can take advantage of against the greenback. As long as that’s the case, then I think we do have downward pressure. However, the interest rate differential by itself will necessarily be the sole reason to trade this market, and of course it is probably worth noting that the Mexican economy is highly labor to the US economy. After all, Mexico is the largest exporter to the United States now, not China. In fact, companies continue to move to Mexico and away from China, so we are getting a picture where the Mexican peso probably needs to be stronger than it has been historically.
That being said, the 16 pesos level has historically been crucial, so it’s not a huge surprise to see that we have tried to bounce from there. Whether or not we can stay above there remains to be seen, but the 16 pesos level is a major “flip on the chart” when it comes to the monthly charges, and if we rise above there then it obviously would be a huge event as it would continue the longer-term trend. However, if we were to break down below the level, it could be like a trapdoor opening and it could send the US dollar plunging against the Mexican peso.
You do get paid to hold this pair to the downside, meaning that you would short the greenback. However, if there’s any concern about the global economy, the Mexican peso is not a place you want to be. This is quite simply driven on interest rate differential and risk appetite.
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