Peso turns weak on widened trade deficit

On the basis of a dovish rate hike by the Fed in June and a decline in consumer prices in May, on June 16th , we had expressed a desire to go short in the USD/MXN pair at 18.10 levels.

Our decision was also fuelled by a Mexican trade surplus in April. The trade ended in profit as the pair declined to 17.70 levels.

As explained below, considering the latest economic data and research report from JP Morgan on the US dollar, we anticipate a bullish reversal in the USD/MXN pair, which is currently trading at 17.90 levels.

In a recent report, analysts at JP Morgan has stated that the Greenback is undervalued by as much as 2.5% against other rivals. The market is yet to take into account the recent rate hike by the US Fed. The interest rate differentials favour an upswing of the US dollar. Additionally, all gains made from the Trump’s rally were lost in the past few weeks. While there is a temporary softness in the inflationary pressure, there is no change in the fundamentals. Furthermore, the country is close to full employment.

In the case of Mexico, the economy contracted 0.7% y-o-y in April – the first of its kind since June 2013. In March, the economy contracted by a downwardly revised 4.3%. A 4.4% decline in the industrial production contributed to the overall economic contraction. However, on a seasonally adjusted basis, the economy expanded 0.1% m-o-m in April.

Furthermore, in May, Mexico posted a trade deficit of $1.079 billion, compared with a trade deficit of $442.1 million in the previous month. It is the largest trade deficit since May 2015. Analysts were anticipating a trade surplus of $1 billion. Thus, poor economic data is expected to weaken the Mexican Peso in the short-term.

The USD/MXN pair is trading above the major weekly support of 17.80. Furthermore, Williams’ percentage range oscillator indicates an oversold situation. Thus, we can expect a reversal in the currency pair.

To benefit from the probable uptrend, we are considering opening a long position in the USD/MXN pair near 17.90, with a stop loss order below 17.60. The long position can be closed near 18.47.

In the forex market, we wish to replicate a similar setup by purchasing a high or above option. We would opt for a contract expiring on or around July 8th . Additionally, a strike price close to 17.90 is needed to keep the risk to a minimum.