Peso weakens as Trump reaffirms Mexican wall plan
During the past five months, one of the currencies which had a roller coaster ride is the Mexican Peso. Between November and January, the USD/MXN pair gained strength on account of Trump’s unexpected victory in the US Presidential race.
Once Trump took charge as the President of the US, the USD/MXN began to decline. The main reason for the decline was Trump’s remark about the US dollar being too strong.
The second reason was the unexpected 50 basis point rate hike by the Bank of Mexico. It was the second hike in as many months. It did not stop with that.
The Bank of Mexico tightened policy once again last week. This pushed the USD/MXN pair to a low of 20.24. However, we anticipate a short-term bullish reversal in the USD/MXN pair on the basis of the facts provided underneath.
The Mexican Peso strengthened last week, mainly due to a hike in the benchmark interest rate announced by the Bank of Mexico. The rate hike was announced to control a sharp rise in the consumer prices in the recent months. In January, the inflation increased 4.72% on a y-o-y basis. It was higher than market’s expectation of a 4.70% increase. It is the seventh straight month of rise in the consumer prices.
The Mexican economy expanded 0.6% q-o-q in the final quarter of 2016, compared with 1% GDP growth in the previous quarter, and lower than analysts’ expectations of 0.7% growth. The automobile industry clearly reflected the slower growth. The production increased 4.1% y-o-y in January, compared with 8.8% y-o-y growth in the previous month. More importantly, the exports declined 0.7% y-o-y in January, compared with a 4.8% increase in the earlier month. It can be noted that 80% of Mexico’s exports reaches the US ports. The US President has reaffirmed that his government will proceed with the construction of a wall along the Mexico-US border, and the cost will be borne by the South American country.
The US economy, on the other hand, continues to perform reasonably well and better than analysts’ expectations. According to the US Department of Labor, the unemployment claims in the week ended February 4th declined to 234,000, from 246,000 reported in the earlier week. The reported figures contradicted analysts expectation of a rise in the unemployment claims to 249,000.
The USD/MXN pair is now trading near a proven strong support level of 20.30. Technically, an oversold scenario is reflected by Williams %R indicator’s reading of – 100. Thus, it is advisable to avoid short position at this level as there is a high probability of a bullish reversal.
On the basis of the analysis, a currency trader can take a long position in the USD/MXN pair near 20.30. To minimize losses, a stop loss order should be definitely placed below 19.90. The long position can be diluted near 21.25.
A binary trader can acquire a call option contract to gain from the probable rise of the USD/MXN pair. The suggested trade can be entered when the currency pair trades near 20.30. Furthermore, the contract should not expire before February 21 st .
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