It seems the U.S. dollar index (USD) has stopped going down. Since careening to its lows in January, the U.S. dollar has bounced up and down through a well-defined range.
The U.S. dollar gained each of the last 4 trading days as part of its latest run-up toward the top its trading range. This renewed strength enhanced a surge of weakness in the Mexican peso ahead of a Presidential debate this weekend.
Based on this surge, my exit from my short USD/MXN position came just in time. At the time, I pointed out that the risk/reward favored a relief rally for USD/MXN. Now that this rally has happened, I am eager to get in short again. I assume the passing of the debate without “incident” will help assuage whatever fears went into the debate to drive rush to the peso’s exits.
However, I will be patient: the U.S. dollar may break out above its trading range sometime soon based on increasing bond yields in the U.S. Moreover, NAFTA-related headlines could also cause dramatic swings in USD/MXN. So I will likely wait until the 18.8 to 19 range before considering a fresh short. A USD breakout will make me less inclined to short USD/MXN. I do not want to sustain a long in the pair because of its high carry (interest rate).
Be careful out there!
Full disclosure: no positions