- The U.S. dollar continues to weaken against the Mexican peso as rate differentials favor carry trades.
- A break below 18 pesos reinforces the downtrend, with technical levels pointing toward 17.5 unless risk aversion returns.
The U.S. dollar continues to struggle against the Mexican peso, which makes a certain amount of sense considering that the Federal Reserve is likely to cut rates over the next year or so, while Mexico will offer a more attractive yield. In other words, this is simply the carry trade using the US dollar as a funding currency. This is one of the few bigger currency pairs that you can do this in at the moment. And of course, it has been in a pretty relentless downtrend for the better part of the last seven or eight months because of this.
With that being the case, we have to look at the overall trajectory. And as we are below the 18 Mexican peso level at the moment, it does suggest that we probably go to 17.5 Mexican pesos, as this pair is very technical in its nature and tends to move half of a peso at a time.
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Trend, Levels, and the Carry Trade
When you look at the overall downtrend, it really kicked off in April, and that was when Donald Trump had suggested that maybe there was some leeway with the tariffs. Once that happened, this pair really started to fall apart. There have been times of consolidation, and maybe we're heading into that, but breaking below the 18 peso level for me is a big psychological victory for the Mexican peso bulls and therefore opens up the possibility that we are in fact going to start heading down to that 17.5 peso level.
Which, of course, is an area that when you look at the past, is important, and people have traded it quite aggressively in both directions in the past. So, all these line up quite nicely. The one counterpoint to this might be if we do in fact see some type of massive global slowdown, which, of course, would help the US dollar because people start to look for treasuries for safety.
Right now, though, this looks like a steady-as-she-goes short.
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