Strong Q2 GDP growth turns Greenback bullish

The USD/MXN pair has been on a decline for the past six-months. The inability of the Trump administration to push through the much anticipated tax reforms, failure to repeal Obama care, soft inflationary pressure, and weak wage growth had kept the US dollar under pressure.

While there was nothing spectacular about the Mexican economy, the unexpected rate hikes and a rally in the crude oil to about $55 per barrel paved way for the strengthening of the Mexican Peso. However, we expect a bullish reversal in the USD/MXN in the days ahead, on the basis of arguments presented below.

In the US, the Non-Farm Employment Change data reported on Wednesday indicated that jobs continue to be available in plenty. According to Automatic Data Processing, Inc. and Moody’s Analytics, the economy added 237,000 jobs in August, versus analysts’ expectations of 185,000. In particular, payrolls in the service oriented industry grew by 204,000. Strong construction and manufacturing sector ensured that payrolls grew at the fastest pace in five months. In the previous month, the economy added 201,000 jobs.

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Crushing all the pessimism surrounding the US economy, the Bureau of Economic Analysis reported that the economy grew more than expected in the second-quarter, aided by higher personal consumption and business investment. In annualized terms, the GDP grew 3% to $17.03 trillion, up from 2.6% growth recorded in the previous quarter. Analysts had anticipated a GDP growth of 2.7%. The Mexican economy grew 1.8% y-o-y in the Q2 2017. It was well below the 2.8% GDP expansion reported in the earlier quarter, but in line with analysts’ estimates. The second-quarter growth rate was the lowest since Q2 2014. A slowdown in services, industry, and agriculture resulted in a decline in the economic activity.

Mexico continues to reel under high inflation. The consumer prices increased 6.44% y-o-y in July, after rising 6.3% in June. That was higher than analysts expectation of 6.37%. It is the thirteenth successive month of increase in inflation. A rise in food and energy prices led the inflation to its highest level since December 2008. On a monthly basis, consumer prices increased 0.38%. The country also posted a trade deficit of $1.523 billion in July, the biggest since January. Thus, economic data favor an uptrend in the USD/MXN pair.

The USD/MXN pair has found support at 17.65, as indicated in the price chart below. Additionally, the currency pair is trading above the 50-period moving average. The underlying bullishness is also confirmed by the rising momentum indicator. Thus, we expect an upswing in the currency pair.

In the spot currency market, we are planning to open a long position near 17.65 levels, with a stop loss order below 17.45. We would book profit when the pair reaches the next resistance level of 18.24.

We may also invest in a call option to mimic the long position in the currency market. The investment would be made when the USD/MXN pair trades near 17.65. To increase the chances of success, we will choose a date around September 8th as the expiry date of the option contract.