04-11-2018: June Mexican Peso: Trump's Trade War Spooks Everybody

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors


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There seems no question that Trump's inconsistent and vague assertions about NAFTA have affected the Mexican currency markets overly. The Mexican Peso exchange rate is generally considered to have way overshot where the fundamentals say it should be. There is some uncertainty about an upcoming presidential election in Mexico where a very liberal leader will probably win which is considered bad for business there. But at the same time it is expected to eliminate a lot of corruption. Currency commodities tend to move in trends that last for very long periods of time, and clearly the current Peso trend is up. It has a considerable way toi go to recover from all the machinations of a rather unstable government to the north of Mexico. Fundamentals, according to some major banks and exchange analysts, could propell that recovery higher for a considerable time to come. If one looks at news stories and assessments through last December, and compares them with the same sort of news today, he will see that opinion has shifted 180 degrees from the majority of analysts.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

June Mexican Peso:

Parabolic Chart

Nirvana Chart

June Mexican Peso:

Initial Chart

News Analysis

Citibank believes a recent fall in the Mexican Peso was an overshoot not based upon fundamentals, but rather fears related to the President's dumping NAFTA. Citigroup's analysis includes the real effective exchange rate, the purchasing power adjusted for inflation, tracked by the Bank for International Settlements. Mexico's currency is among the most undevalued when compared with its long-term average. Continued implementation of economic reforms under an election for President of Andres Manuel Lopez Obrador in July. Mexico has a strong growth potential, a stronger fiscal position, and narrowing current account deficit as the year wears on.

However, a Reuters poll of economists suggests recent strength in the Mexican Peso is unlikely to hold in the coming months as President Trump doubles down on his protectionist stance. There has been a recent change in economists who last month shrugged off the prospect of a global trade war. Now it looks more likely. Mexico could be caught in the crossfire between the U.S. and China. Mexico and Canada were exempted in recent U.S. measures to target 1,300 Chinese industrial technology, transport and medical products prompting swift retalliation from China.

Citibank looks for 17 pesos to the Dollar while Reuters suggests 18.5 pesos to the Dollar is likely in the coming 12 months.

A lot is at stake for Mexicoi in the coming weeks, as trade talks are about to bleed into the campaign kickoff for Mexico's presidential election in July, which has investors bracing for market-driving headlines. There are numerous unknowns that could shake Mexican assets. There was a scarcity of Peso selling after Mexico's GDP numbers fell short of expectations recently.

Front runner Obrador, a former mayor of Mexico City, founded his National Regeneration Movement in 2104. He is potentially more pragmatic and less corrupt. Rabobank believes Mexican policy under Obrador would not make a 180-degree turn from its present policies. A selloff in the Peso on Obrador's election would likely be caused by the fact that as a newcomer he is unknown to market participants. (Markets abhor uncertainty.)

An eighth round of NAFTA trade talks is anticipated to begin this month (April) in Mexico City. The Trump Administration would likely try to tie a deal to immigration somehow.

Andres Manuel Lopez Obrador is considered a "hard leftist." He is topping polls with 32% versus his closest rival who has 26% and the next one 16% after that. Some consider that Obrador strikes fear into the captains of industry in Mexico. They caution the Peso could depreciate a long way, even to 23.5 to the Dollar.

Many investors are looking at the Canadian Dollar as a better bet than the Mexican Peso because it has fallen 7.5% against the Peso so far this year. But Mexico has much greater political risk than Canada.

President Trump's "shock and awe" threats to quit the NAFTA treaty are starting to sound hollow as Mexico and Canada shrug them off. In his book, "The ARt of the Deal," Trump talks about making unrealistic demands and threatening to walk away from the table as a negotiating tactic. Mexico's Foreighj Minister Luis Videgaray has already brushed off Trumpl's comments as little more than a negotiating tactic. It is not even clear that Trump has the power to unilaterally rescind NAFTA even if he wanted to do so. Congress is responsible for regulating international trade under the U.S. Constitution. But so far, Republic lackeys in Congress show little signs of reigning in their runaway President.

If Trump were successful, Mexico would be hurt worse than the U.S. The consequences would be more serious because Mexico is a poorer nation. Yet the Mexican Peso has been the world's top-performing currency recently since Trump's inauguration, a seemingly unlikely probability.

A turning point for the Mexican Peso against the Dollar sending it upward occurred when Trump's legislative defeat occurred in late March when House Republicans pulled their health-care bill after failing to corral enough support for it. Markets were too quick to price in the impacts of Trump's promised fiscal policies. The U.S. Dollar has weakened broadly against most rivals, with this weakness supported by the Trump Administration, suffering its largest decline against emerging-market currencies like the Peso and the Brazilian Real. Investors stand to reap a much more attractive return betting on the currencies and bonds of emerging-market nations due to interest rate differentials. But the Federal Reserve most recently signaled after jacking up interest rates to help defend the U.S. currency from Trump-related fallout, that it was now less worried about placing the country's manufacturers at a comparative disadvantage, and to let the U.S. currency appreciate, if possible.

Commerce Secretary Wilbor Ross said the Peso should recover if the U.S. and Mexico reach a "sensible" new trade agreement.

Opinions are certainly mixed about where the Peso goes from here. But as we read the news, no barriers have been able to arrest the recent rise of the Mexican Peso, where it was felt it overshot on the way down on NAFTA trade fears. Reasons for the rise include the Federal Reserve's projection for an easy pace of rate hikes. The Fed signaled that it would main on the original path it set out for the rest of this year. Soothing tones adopted by U.S. officials regarding trade ties with Mexico are very significant in moving markets.

Our assessment is that as Trump's trade war policies expand, markets show disapproval and equities recently are slumping in the U.S. placing more downward pressure on the U.S. Dollar. This should help the Peso to Dollar exchange rate. But the markets are so spooked by all the inconsistent and confusing messages eminating from the White House that increased volatility and potential for market manipulation are at a point where, as markets abhor uncertainty, investors may not be willing to risk investing in the Peso as long as Trump's vagueries persist. The Peso has demonstrated an ability to "turn on a dime" so-to-speak. Still, trends in currency exchange rates tend to be good for long periods of time, and the recent trend in the Peso is up.

Point & Figure Chart

615.0I                                                                  T  4/ 6
     I CME - Jun-18 Mexican Peso 500K P, c/100 P   Cm.=0.01  Lim.= 0.6
     I   X
     I X XO
     I XOXOX
     I X  OXOXO
     I X  O OXO
     IO     O O
     I        O
     I        O
     I        O
     I        O                                      X
     I        OX X                             X X   X
     I        OXOXO                            XOXO  X
     I        OXOXO                          X XO O  X
     I        OXOXO    X                     XOX  O  X
     I        OXOXO  X XO                    XOX  OX X
     I            O  XOXO                    X    OXOX
     I            O  XOXO                    X    OXOX
     I            O  XO O      X             X    OXOX
     I            O  X  O      XO    X     X X    O OX
     I            OX X  OXOXOXOXOXOX XO    XOX      O
     I            OXOX  OXOXOXOXOXOX XO    XO
     I            OXOX  OXOXO O O OX XO    X
     I            O OX  OXOX      OXOXO    X
     I              OX    OX      OXO O    X
     I              OX    O       OX  O    X
     I              O             OX  O    X
     I                            O   OX   X
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     I                                O OXOX
     I                                O OXOX
     I                                  OXOX
     I                                  O OX
     I                                    OX
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     I                                    O
                  1                1111111         11
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Project". It is giving a buy signal.

Internal Printout 1

Results of "Project" for Mexican Peso (blue lines = successful trades, red, unsuccessful): (Not always in the market.)


Third System Confirmation

Our third system has just triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $50,000. Initial margin on a single contract is $1.089. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Mexican Peso September .0455 Put and Sell (1) Mexican Peso .0530 Put @ .001470 to the sell side or greater.

o 1 o 2 o 5

Calendar Spread

What the Jun. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at -13.00 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +22.00 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be headed toward but well away from the buy the near, sell the far point.

Level Table:

The path of least resistance is up.
555.0|                                                                  T  4/ 6
 CME - Jun-18 Mexican Peso 500K P, c/100 P   Cm.=0.01  Lim.= 0.6
475.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.756
                                 1 1 1 1 1 1                          
       4 4 5 5 6 6 7 7 8 8 8 9 9 0 0 1 1 2 2 1 1 2 2 3 3 4           4
       0 2 0 1 0 1 0 1 0 1 2 1 2 1 2 0 2 0 2 0 2 0 2 0 2 0           0
       7 1 5 9 5 9 3 8 1 5 9 3 7 1 5 8 2 7 1 8 3 6 1 7 1 5           6

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 4/07 ).

Intraday Chart

                 Risk Versus Opportunity Report

                  PXM8    June Mexican Peso

                      High Price:  5572
                   Current Price:  5400
                       Low Price:  5314

                            Risk:  0.032
                     Opportunity:  0.063

                    (O/R) Ratio =  2.000

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 10
Place 13 June Mexican Peso on a Buy Watch with stoploss @ -8.92 below the get-in point when recent price is represented as "541.40".