Originally published by AxiTrader
Banxico, as the Mexican central bank is known, held its first auction of $1 billion in available USD/MXN hedges last night. It was oversubscribed two to one which tells us that there are still plenty of investors and corporates who don't believe the pesos recent 10%+ appreciation against the US dollar won't stick.
Yet even against this back drop the USD/MXN sits around the lowest levels since president trump won the US election back in November last year.
As I wrote recently I believe this strength in the peso is a result of the strong stance of the Mexican president and his ministers along with a confluence of the technical (charts) outlook.
The level I highlighted to watch was the 19.40 region with a close below it opening the way to the trendline support which today comes in around 18.75/80.
So today, after USD/MXN has risen a little off the pre-auction low of 19.43 and its test below the 200 day moving average the big question whether the excess demand in the Banxico hedge auction shows that the peso bears are on the way back.
Certainly the latest published Reuters polls suggest that is the case. Reuters reports respondents to their survey see USD/MXZ at 20.76 in one month and 21.19, and 21.505 on a 3 and 6 month time frame.
And the chart of USD/MXN at present suggests prices are oversold on a daily basis which would support the hypothesis this important - for some traders - 200 day moving average will again prove the end of the peso's rally.
But as US commerce secretary Wilbur Ross said just last week - when he ignited a rally in the peso and selloff in the USD/MXN - if the US and Mexico can reach a sensible agreement on NAFTA.
Ross told CNBC Friday that "the peso has fallen a lot, mainly because of the fear of what will happen with Nafta. I believe that if we and the Mexicans make a very sensible trade agreement, the Mexican peso will recover quite a lot".
Quite a lot indeed if USD/MXN can breach the 200 day moving average and the trendline below.
Which brings me to the weekly outlook for USD/MXN where it looks like it is still working off the massive rally from Q2 2014 to the trump rally high. That outlook suggest at least a test of the trendline from the start of the rally around 19.00/20. and if that breaks
As always the McKenna mantra is that I respect trendlines unless or until they break. But if it does break then 18.60 becomes the garden variety target as it represents the 38.2% retracement of that multi-year rally.
Here's the chart.
Have a great day's trading.