Trumping The Peso
The Donald is creating a bit of an opportunity for us currency traders.
Much of the recent action in the USDMXN (NYSEARCA:UUP) pair has been a direct result of how Trump is doing in the US elections. When it looks like he's winning, the currency loses value. And when Hillary is up, the peso strengthens.
The markets fear Trump's protectionist policies. His talks of either renegotiating or ending NAFTA would be terrible news for Mexico whose economy has depended on open trade for growth over the last two decades. Any form of protectionism from the US would be especially devastating considering that 80% of Mexican exports go directly there. The fact that Trump keeps talking about making them pay for a $10 billion wall does not drum up much confidence either…
Trump's recent terrible performance with the debate and leaked video have helped strengthen the peso over the near term.
But the larger trend hasn't changed. The peso is still in trouble. The currency continues to lose value and is getting very close to the psychological key level of 20 pesos to one dollar.
The Bank of Mexico has not been able to stop this decline either. Just the other week, they raised interest rates for the third time this year. The central bank hiked by 50 basis points, bringing the overnight rate to 4.75%, the highest level since 2009.
The hike was an attempt to stem the currency depreciation. Banco de Mexico officials are worried that a weaker currency will lead to a spike in inflation. Recent retail prices already rose faster than expected. And the prices of medicines and petroleum have also risen due to the weaker currency. Inflation is currently 2.88%, which is still below the 3% target, but the bankers are trying to get ahead of the problem before it spirals out of control.
Despite the central bank's efforts, they have been unable to stop the uptrend in USDMXN. The bankers already tried a hike of 50 basis points in February. It resulted in a temporary strengthening and then a quick reversal to the dominant trend. The same will likely happen here.
And from a broader perspective, they aren't exactly hiking within a strong economy. GDP is slowing down and experienced its first contraction in 3 years in the second quarter. The bank also lowered their current year growth forecasts.
Just like the other export-oriented countries that are experiencing slowing economies, Banco de Mexico will likely be forced to go back and cut rates again, which will only exacerbate the depreciation of the peso.
The market's short-term focus on Trump has caused a retrace in USDMXN that is now giving us a chance to enter the overall upward trend. And with recent dollar strength, going long USDMXN should pay out nicely. Our strategy is to trade in and out the longer-term trend up.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.