Originally published by AxiTrader
Key Takeaway
The Mexican peso is back.
After looking like a combination of a Fed keen to tighten and a belligerent US administration would continue to drive it lower it has staged a remarkable recovery.
From it's weakest point when USDMXN was above 22 in January this year the peso has strengthened more than 10% to currently sit at 19.68 this morning. That's the lowest level since the 9th of November.
Technically it looks like the peso can continue to strengthen. But there is a possible interesting explanation as to why investors are rewarding Mexico and buying the peso.
What You Need To Know
The background to this post comes from my two and a half hour journey home last night.
As I was driving home from Sydney after a board meeting I did what I usually do and listened to a few of my favourite podcasts. These included the daily Bloomberg Surveillance podcast hosted by Tom Keene and David Gura, the weekly Bloomberg Benchmark podcast, and of course Michael Covel's Trend following podcasts.
All of them were great listens and I highly recommend them.
But it was Covel's latest interview with Annie Duke, a poker player, author, decision-making expert, and cognitive scientist which prompted this post about the Mexican peso and what might be driving it right now.
That's because Duke offered a neat explanation of how Mexico is currently at least holding its own against the aggressive rhetoric of US president Trump, and perhaps could be viewed as actually winning this battle.
Let me explain. Duke used poker and game theory as a way to explain how to handle someone when they are being outwardly aggressive.
She said there are two choices when playing poker. You either save your chips until you have a solid defendable hand and get aggressive back only on those occasions. Or, the alternative is to effectively fight fire with fire .
Choosing your battles might sound like the right choice initially but at the poker table, and in game theory, you can come out behind even if you win those hands because you are getting so resoundingly belted at other times.
The alternative approach - fighting fire with fire - of being as aggressive back Duke suggested was actually the right approach because it destabilised the opponent and meant they couldn't tell when you were bluffing or when you have the winning hand.
Sounds like the Australian prime minister on that famous phone call to Trump and certainly the approach that Mexico has taken with Mexican president Enrique Peña Nieto cancelling his meeting with president Trump back in January. It's also the approach his various ministers have taken in the run up to the overnight meetings with US Secretaries of State and Homeland Security Tillerson and Kelly.
Is it any surprise then that the US administration has pushed ahead with plans but been more conciliatory with its Mexican neighbours of late.
Indeed Secretary Tillerson said in a press conference after the meetings today, including with the Mexican president that they had been very productive and that the US and Mexico are two sovereign countries which will have differences.
Now you may be wondering why a strategist is gibbering on about the politics of US-Mexican relationships, game theory, and poker.
The reason is that as a behavioural economics and finance guy these are key lenses for me to view economics and markets. Also, lets face it, politics these days is as important as economic fundamentals for many currency pairs and especially the US dollar.
What I believe is happening here is that traders and investors are seeing the effect of the mexican stance in tempering the US adminsitrations overt agression and making a determination that the worst fears they held for the peso and the Mexican economy were overblown.
As a result, USD/MXN is falling further and faster than the US dollar against the major currencies such as the euro.
Looking at the charts for USD/MXN from our AxiTrader MT4 platform it looks like prices could continue to fall. It's entering a consolidation zone which was previously resistance.
It's come a long way in a short time frame. But a break of 19.40 could usher in a retest of 18.70 trendline support. Then we'll see what happens next.
Have a great day's trading.