Peso strengthens on changing political landscape in US

The US Presidential election has increased the volatility of the Mexican Peso than any other currency. The most important reason for the increase in the volatility is the stand taken by the Presidential candidate ‘Trump’ against the NAFTA partner.

Trump is of the view that Mexico is causing harm to the interest of the US and its citizens. The conservative view and the call for a wall to be built along the Mexican border continue to affect the value of the Peso. Whenever a survey indicates a gain for Trump, the Peso gets beaten, and vice-versa. With just few more weeks to go for the election, the USD/MXN has fallen to 18.95.

We anticipate the bullishness in the Mexican Peso to continue due to the reasons explained underneath.

According to the Credit Suisse strategist Alvise Marino, the probability of Trump winning the US Presidential race has come down to 17%. It was as high as 42% in June. Marino anticipates Hillary’s victory would take the USD/MXN to a low of 18.0 in the next three months.

FOX 10 Phoenix

Leaving aside the US election, the Mexican economy is showing signs of recovery. In August 2016, the country’s trade deficit has fallen 32% to $1.91 billion, from $2.82 billion a year-ago. The analysts were expecting a deficit of $2.37 billion. Similarly, the unemployment rate has fallen to 4% in August, from 4.7% in the similar period last year. It is the lowest recorded unemployment rate since 2008.

In September 2016, the inflation rose for the third-month in a row. The inflation increased 2.97% on a y-o-y basis. The recorded inflation is only a few notches below the Banco de México’s (Mexican Central bank) 3% target. Earlier in August, the consumer prices increased 2.73%.

On the other hand, the US dollar is expected to rise only when is a firm indication of a Fed rate hike. Thus, Mexican Peso is expected to remain strong for the next few weeks. The USD/MXN pair is moving within the declining channel as shown in the chart below. The pair now faces minor resistance at 18.98 and major resistance at 19.38. The RSI oscillator is declining as well. So, we can anticipate a downtrend in the USD/MXN pair.

In the current scenario, a short position has higher chances of success. So, a currency trader can go short at 18.95 levels with a stop loss order above 19.25. The short position can be covered when the USD/MXN pair drops to 18.40 levels. A similar setup can be created in the binary options market through the purchase of a one touch put option. While the target level for the put option can be anything above 18.40, the expiry period should be preferably in the second week of November.

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