Speculators In the Mexican Peso Last Did This At Oil’s 2014 Peak

On April 17, 2017, speculators turned bullish on the Mexican peso for the first time in 2 years. That point 2 years ago was a brief 1-week relief from on-going bearishness against the peso. The latest data on net non-commercial positions (speculators) show that the nascent bullishness in the peso carried over into a second week. Speculators have not stayed bullish on the peso for two weeks in a row since September, 2014, a little over 2 1/2 years ago when oil prices hit a major peak just ahead of a major collapse.


Speculators turned definitively bearish on the peso starting in late 2014 just as oil prices were peaking and prepping for a crash.
Speculators turned definitively bearish on the peso starting in late 2014 just as oil prices were peaking and prepping for a crash.

Source: Oanda’s CFTC’s Commitments of Traders

This switch to peso bullishness comes on the heels of the peso’s complete recovery from its post-election losses. The chart above shows how speculators gradually and then VERY quickly closed out their net short positions against the peso as it became increasingly clear that post-election momentum had topped out for USD/MXN.


The Mexican peso printed an impressive post-election recovery in 2017 against the U.S. dollar (USD/MXN).
The Mexican peso printed an impressive post-election recovery in 2017 against the U.S. dollar (USD/MXN).

Source: FreeStockCharts.com

With President Trump softening his stance on the North American Free Trade Agreement (NAFTA), the Mexican economy, and thus the peso, can heave a sigh of relief. I assume that the peso’s rally in 2017 was a general anticipation of President Trump approaching NAFTA differently than candidate Trump. While these are the early days of the President’s shift to renegotiation from the campaign rhetoric of complete pull-out, I think the market will continue to maintain a slight bullish bias on the peso going forward (meaning fading rallies in USD/MXN will likely be the better risk/reward rather than buying dips).

Still, the current relief for the peso sits within a larger context of an extended losing streak since oil topped out in 2014 ahead of a subsequent collapse.


USD/MXN has gained 28% since the end of 2014 as the peso weakened mightily in the face of collapsing oil prices.
USD/MXN has gained 28% since the end of 2014 as the peso weakened mightily in the face of collapsing oil prices.

Source: FreeStockCharts.com

Even after oil bottomed in 2016, the Mexican peso failed to benefit.


Oil prices look like they have finally bottomed, but they also looked stalled out now.
Oil prices look like they have finally bottomed, but they also looked stalled out now.

Source: U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis; April 29, 2017.

The U.S. Oil Fund ETF (USO) lost its post-election gains in mid-March. Overall, USO has gone nowhere in over a year.
The U.S. Oil Fund ETF (USO) lost its post-election gains in mid-March. Overall, USO has gone nowhere in over a year.

Source: FreeStockCharts.com

So the jury is out as to whether the peso will require definitive positive economic and/or political catalysts to continue its path of recovery. Based on the past record of peso speculators, I will look to their positioning for key clues.

Be careful out there!

Full disclosure: short USO put options

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