- The US dollar has been pretty noisy against the peso on Thursday, but at this point, it looks like we are going to see rallies to sell into.
The US dollar has been pretty noisy against the Mexican peso during the trading session, but I think at this point in time, it’s likely to continue to watch the 17.5 level above offer significant resistance. The market has been very negative for a while, and with that being the case, I think as soon as we see some type of exhaustion, it’s probably a selling opportunity.
Longer term, I think the market is likely to go looking to the 17 pesos level. You have to keep in mind that this is a pair that pays you to get short. The Mexican peso’s interest rate differential definitely favors itself over the US dollar, and the recent sell-off, I think, was just an acceleration of the carry trade.
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Market Dynamics and the Carry Trade
Now that we’ve had the FOMC press conference and of course the volatility that we’d seen during the day on Thursday, I think you have a situation where you very well could end up being a seller on this type of move, and I think we go much lower.
I have no interest in buying this pair because number 1, I don’t like the idea of paying swap. And number 2, this is a backwards currency pair in the sense that the Mexican peso does better when the US does better because it is the number 1 exporter into the United States.
Therefore, Mexico’s economy is highly interlinked with the American one. If the US economy starts to fall apart, that actually helps the dollar in this particular pair and hurts the Mexican peso. Ultimately, this is a market that I still want to get short. I think the signs of exhaustion later in the day are a sign that we are about to start falling again.
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