- The US dollar has been fairly quiet against the Mexican peso during trading on Thursday, as we continue to see the carry trade operate.
The US dollar has been fairly quiet against the Mexican peso during trading on Thursday, as the 17.50 level is offering a little bit of psychological and structural support. That being said, I think any short-term rally at this point in time probably offers value because this is a major downtrend that has been in play for a while.
When you look at the chart, you can see quite clearly that recently we have accelerated to the downside in a market that, quite frankly, even though it trends quite well for long periods of time, typically is more of a grinding market.
Keep in mind that the central bank in Mexico offers 7% while the United States offers 3.75%. So, there is an interest rate differential swap that pays you to be short of this market. In fact, I am, and I do have a portion of my portfolio that I do this exact type of trading with. Albeit not massive, it does add up over the course of a year.
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Short-term Ceiling
Short-term rallies, I think, will have traders looking for the first signs of exhaustion to short, and the 18 pesos level, for me at least, is a short-term ceiling. If we can break down from here, then the most logical place to look for the next support level would be somewhere near 17.25 pesos.
The interest rate differential isn't the only thing, though, because we also have the fact that Mexico is the largest exporter to the United States, which is doing quite well. The better the US economy does, the worse this pair does. That's because people are buying Mexican goods. They're chasing yield, that type of thing.
So as long as that's the case, I remain short of this pair and will hang on to collect my swap.
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