USD/MXN bounces off lows around 21.42; Who cares more about NAFTA?

Currently, USD/MXN is trading at 21.42, up +0.19% on the day, having posted a daily high at 21.45 and low at 21.25. 

The landscape changes at an incredible pace for the USD/MXN exotic, as the currency went from the imminent 23.00 risk to erase almost all gains collected in the last 3-weeks due to a severe shift in market sentiment towards the US dollar, then there is only one questions left; Is the Trump Trade over?

Historical data available for traders and investors, during January, indicates that USD/MXN had the best performance at +1.83% (Jan.10) and the worst at -1.69% (Jan.20).

Behave as your Neighbour; U.S.A. vs. Mexico

Reuters reports, "Mexico's economy minister said his country was ready to renegotiate trade rules with the United States and that any change in U.S. tax policy that affected imports would have to be countered with a "mirror action" in Mexico. If there is any action that punishes imports to the North American market and encourages U.S. exports, you have to reflect it in a mirror action to counteract the change of incentives that this would make for activity and investment in Mexico," Economy Minister Ildefonso Guajardo said in an interview in the newspaper El Universal on Monday."

$1 trillion in trade; NAFTA

Barbara Rockefeller, President at Rockefeller Treasury Services notes that the fundamentals if they don't run off the rails, favor higher growth arising from tax cuts and some fiscal stimulus. Assuming there is some inflation in there, the Fed will have to become more pro-active. As noted previously, we don't see it yet in rising expectations for that third hike this year, although hedgies are getting into TIPS. Higher returns support a stronger dollar.

She further writes, "One tidbit originating in a FT story about re-writing NAFTA comes from a guy at the Peterson Insti-tute, which knows a thing or two about trade. The thrust of the article is that NAFTA is a really big deal—over $1 trillion in trade among the US, Canada and Mexico. But the useful nugget is the econo-mist Hufbauer, who says "This is a president of symbols. But we have to distinguish between the sym-bol and the substance. What Trump needs for his base and to answer his political promises is to get rid of this five-lettered name [Nafta]. But underneath that name there are a lot of working parts."

"Hufbauer's point is that "the 1987 deal could be one of the building blocks of a successor to Nafta should the latter collapse." Technically, Congress would have to repeal Nafta. Changing it is tremen-dously difficult. Hufbauer does't say so, but Trump lacks patience. Actually, Congress lacks patience, too. It took many years to build Nafta and the implications of changing just about anything reverberate and pin-ball around multiple areas, including FDI and various tricky legal things. It can't be done with the stroke of a pen," concludes the veteran technical analyst.

Technical levels to watch

In terms of technical levels, upside barriers are aligned at 21.48 (100-SMA) and above that at 21.64 (50-SMA). While supports are aligned at 21.24 (low Jan.24) and below that at 21.12 (low Jan.5). On the other hand, Stochastic Oscillator (5,3,3) seems to retrace from the oversold territory, therefore, there is evidence to expect further dollar gains in the near term. 

On the long-term view, there is evidence to wait for a deeper correction as price action on the last 2-weeks candle clocked valuable clues as for both rejected 22.00 (psychological mark) and later, a Japanese candlestick that indicates reversal at the top. If the dollar continues this path, supports are aligned at 21.18 (horizontal level), later at 20.38 (flat level) and finally at 19.85 (short-term 61.8% Fib). Does the Mexican Peso have accumulated the necessary merits to drag the greenback lower? The next 24 months may deliver the answer. Meanwhile, 19.85-19.17 region seems to be the most logical horizontal value to reload the long-dollar ammo towards the lucky 23.00 and above.

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