Originally published by AxiTrader
The Mexican peso has had a rough week so far. It has weakened materially in the wake of the trump administration's signals that it is again looking closely at its NAFTA trade partners. That is after making a low at 18.46 - just a tick above the post-November low - on Monday USD/MXN is currently trading at 19.179. That a loss for the peso of 3.89% against the US dollar in the space of just three days.
Clearly the catalyst to this move has been the Trump administration's decision to slap Lumber tariffs of 20% on Canadian wood. But the big spike in USD/MXN overnight, which saw it move from an open around 18.85 and trade up to a high of 19.30, is likely to have been the breaking news via Politico that the administration was preparing an Executive order for the president to sign withdrawing the United States from NAFTA. That could come as soon as this week or early next week according to sources cited by Politico.
That the article also highlighted Republican lawmakers opposition to the deal doesn't diminish the fact that the president and his commerce secretary Wilbur Ross are clearly moving forward on their joint disquiet over the terms under which NAFTA operates and the impact they believe this has had on the US economy.
Indeed Politico highlighted this might just be a tactic of the Administration.
"The draft executive order could be a hardball negotiating tactic intended to pressure Mexico and Canada to come to the table to renegotiate NAFTA and make concessions that are more to Trump’s liking. But once Trump sets the withdrawal process in motion, the prospects of the US turning its back on two of its most important trade partners suddenly become real" Polico's Tara Palmeri, Adam Behsudi, and Seung Min Kim wrote.
But regardless of that, in pure charting terms the imposition of tariffs on Canadian Lumber and this news overnight has perfectly fit with the market set up to drive USD/MXN higher.
The question is what's next.
As readers know I always expect at least a 38.2% retracement after a significant move in markets. It doesn't always happen. But the balance of probabilities is that we see a reversal of some sort - or a consolidation in time - that approximates this type of move.
Which brings me to the USD/MXN chart.
Back in March I highlighted that USD/MXN was under pressure and a break of the uptrend line for the 2014-2016 uptrend would bring 18.60 in as a target. That level was the 38.2% retracement of the 2-year uptrend. The low of 18.45 exceeded that level - but not by much.
More recently USD/MXN has been showing signs of basing as both the MACD and the stochastic indicator recovered and signalled higher prices on the daily charts. The weekly outlook is only just shifting now.
But as you can see in the chart above the USD/MXN ran into both the overall trendline from 2014-2016 and the minor Fibonacci resistance last night.
This is a formidable combination. And after an almost 4% move in 3 days is likely to be pretty solid resistance in the near term. But if the 19.30/35 level breaks then the move to the garden variety 38.2% retracement of the post-election sell off will be at hand and 19.82 will be the target.
But, as I always say, the McKenna Mantra is to respect levels and lines unless or until they break. So in the short term my system - which got long the day before last - will be booking some profit.
Have a great day's trading.