{"id":39847,"date":"2017-06-24T17:37:51","date_gmt":"2017-06-25T00:37:51","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=39847"},"modified":"2017-06-26T23:50:59","modified_gmt":"2017-06-27T06:50:59","slug":"forex-critical-sweet-spot-for-mexican-peso","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2017\/06\/24\/forex-critical-sweet-spot-for-mexican-peso\/","title":{"rendered":"Forex Critical: A Sweet Spot for the Mexican Peso"},"content":{"rendered":"

Just as I had hoped and anticipated<\/a>, the Banco de Mexico hiked its interest rate to 7.0% on June 22nd and kept pace with the U.S. Federal Reserve’s rate hike. Apparently, this rate hike was not a news flash. According to Reuters<\/a>, the consensus opinion also anticipated a rate hike:<\/p>\n

“Analysts expected Mexico would match the Fed’s quarter-point rate hike last week in a bid to maintain the appeal of peso-denominated debt to yield-hungry investors.”<\/p><\/blockquote>\n

Now the question is the future path for rate hikes. Banco de Mexico suggested that rates are now high enough to contain a spike in inflation that has risen to 6.3% (the highest since 2009) and guide the economy back down to the 3% target. Reuters quoted Governor Agustin Carstens from a Bloomberg article:<\/p>\n

“‘We believe that where we are now will lead us to the 3 percent (inflation target) level at some point. We are ready to make the statement that up to today we think it is sufficient but we will be very vigilant.'”<\/p><\/blockquote>\n

The peso strengthened accordingly against the U.S. dollar but only after an initial intraday “sell the news” reaction. The resulting rise in USD\/MXN allowed me a fresh opportunity to fade and get a cheaper starting point for taking advantage of the next round of peso strength. I locked in the profits during Friday’s continuation selling in USD\/MXN.<\/p>\n


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\"The<\/a>
The Mexican peso strengthened against the U.S. dollar in the wake of the seventh rate hike in a row from the Banco de Mexico. USD\/MXN has not made a fresh low yet though.<\/figcaption><\/figure>
\nSource: FreeStockCharts.com<\/a><\/strong>
\n<\/center><\/p>\n

Interestingly, speculators harbored the same hesitation I had going into the Banco de Mexico statement on monetary policy. Mexican peso bulls significantly withdrew with net long contracts dropping from 95,814 to 48,985, a near 50% cut. <\/p>\n

\"Speculators<\/a>
Speculators retreated on net shorts ahead of the Banco de Mexico’s statement on monetary policy. I expect these shorts to rebuild.<\/figcaption><\/figure>
\nSource: Oanda’s CFTC’s Commitments of Traders<\/a><\/strong>
\n<\/center><\/p>\n

This retreat completes a sweet spot for USD\/MXN that includes a clear downtrend, yields high enough to continue encouraging carry trades against a wobbly U.S. dollar, and fresh upside for speculators to rebuild net shorts. While I am content to fade bouts of strength in USD\/MXN, I prefer USD\/MXN to achieve a clear breakdown to a new low. At that point I will again feel very comfortable aggressively shorting USD\/MXN. If the downtrending 20-day moving average (DMA) continues to provide overhead resistance, USD\/MXN could set that new (13-month) low in another two weeks or so.<\/p>\n

Be careful out there!<\/p>\n

Full disclosure: no position<\/p>\n

Addendum June 26, 2017: Bloomberg interview with Banco de Mexico Governor Agustin Carstens:
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