Independent market research for the future investor.

Background:

Figure 1: MXN/USD last 6 months

The Mexican Peso is the world’s eighth most liquid currency globally and offers a high level of liquid access to the emerging Latin American region hence, is an important currency for investors. The MXN/USD is the most traded pairing, given the dollar is the most demanded currency. Many decisions made in US impact Mexico directly due to their 2000-mile shared border and the high level of bilateral trade (the US makes up 76% of Mexico’s total exports and Mexico is America’s 2nd largest trading partner importing 11.9% of US goods.) Therefore, you can see a lot of movement in the last 6 months at times correlated with key events in the US markets. Over the last 6 months, the Peso has appreciated against the dollar from a low of around 0.0420 Mexican Pesos to the dollar on May 14th to a high of 0.0485 at the current moment.

Fundamental analysis:

The analysis will focus on how the outcomes of the election may affect the US-Mexican relationships based on the policies of the candidates. It is important to highlight what drives the Mexican economy before doing this as this will make the analysis clearer. Mexico is an export-led economy (12th largest exporter) and has 46 trade agreements which are more than any other nation. Its main exports are manufactured products and commodities like silver, certain fruits, vegetables, cotton and coffee and is also an oil-producing giant with the production of over 3 million barrels a day. 

As a consequence of what it produces (generally price elastic goods), a poor healthcare system to deal with Covid and dwindling demand for its goods, the Mexican economy has been hard-hit by the pandemic. This means that the Mexican central bank, Banco de Mexico has predicted that the economy could contract by 8% in 2020. This led to a collapse in the Peso earlier in the year as foreign investors recognised the possible myth surrounding Mexico being the “golden example of an emerging economy.”

In terms of why it has appreciated during October from around 0.0450 to over 0.0485 was initially due to the uncertainty surrounding the US election which drove down the dollar, increasing the value of the Peso. Then, in the last 4 days, the likelihood of a Joe Biden victory further bolstered an approximately 3.8% rise in the Peso. This is because Biden’s policy outlines place greater importance on foreign relationships and an integrated global economy than that of Trump’s nationalistic and more protectionist attitude.

Biden differs to Trump on many facets of the US-Mexican relationship. When it comes to immigration we see that Biden wants to stop Trump’s “Remain in Mexico” programme which forces 60,000 Mexican asylum seekers to stay in Mexico before their court dates. A likely Biden victory would mean that immigration becomes more lenient towards Mexicans. This could be a positive for the Mexican economy who will potentially benefit from remittances, a source of economic growth. This is a positive indicator to foreign investors and could be a source of future appreciation in favour of the Peso.

Furthermore, the controversial Trump’s Wall is likely to be abandoned under Biden’s campaign with no longer any pressure on Mexico of this border barrier. Trump attempted to expand this wall and would continue to do so if he were to win the election but with Biden, this is less likely. Again, this is a positive sign for Mexico and its foreign investors.

Trade is said to be relatively unaffected regardless of the outcome as both Biden and Trump advocate and support the USMCA trade agreement, meaning that there is unlikely to be any impact economically on trade for Mexico. Although, Trump has made suggestions of increasing tariffs Biden has not which indicates that there is greater certainty under Biden of a stable trade relationship, which could act as a minor catalyst for an appreciation in the Peso. 

Finally, a significant aspect of future Mexico and US relations which is different for the 2 candidates is in the energy sector. One of Biden’s core policy focusses on a net-zero greenhouse gas emissions by 2050 which involves massive scaling back of fossil fuel use. This means that Biden is likely to put greater pressure on Mexican president, Andrés Manuel López Obrador (AMLO) to focus on renewables and electricity. Therefore, energy is going to be a potential source of major disagreement as the AMLO government policy is hugely dependent on the fossil fuel industry, unsurprising given the importance of oil exports to the Mexican economy. Trump favours the oil industry which made the USMCA trade agreement was stronger on that common ground. This is not to say this hasn’t been with issues too as Trump has interfered in Mexico’s self-sufficiency aims by exporting hydrocarbons into Mexico. Generally, there is a great deal of uncertainty as to how the energy goals and sector will impact future relations. This uncertainty probably hasn’t contributed most likely to the appreciation of the Peso but could be hugely impactful in the future. 

MXN/USD Technical analysis:

Volatility in a market often creates huge opportunities to profit from big swings in momentum. However, the impending election on Tuesday 4^th November has made the dollar a very risky currency to predict on a short-term basis. MIT’s Simon Johnson warned that a Trump victory would “cause the stock market to crash and plunge the world in to recession” whereas JP Morgan analysts wrote to their investors that a Trump re-election could boost equity markets by 12.6%, which would be in line with historical S&P performances after Reagan, Clinton and Obama won their re-elections. On the flip side of affairs, JP Morgan cite a “mostly neutral” market reaction based off a Democratic sweep.

Will we will now analyse the chart technical of the MNX/USD to gain a small insight into the overall optimism of the market.

Figure 2

From merely analysing the 5 hour time period chart for MXN/USD (figure 2), there are already numerous patterns which can identify to the pairing momentum. The most noticable trait from the chart is that there is an overall downwards trend (the orange arrow above) as the initial floating value was 0.04784 before falling to 0.04675- a significant fall of 111 pips. The second sign of a downtrend is from the rising wedge (1), identifiable within the green box above. As demonstrated by the downwards black arrow, this pattern indicates a break in upwards momentum and then a reversal to the downside. Besides these two indications, the EMA and SMA over the 5, 20 & 30 days all indicate a sell position on the currency from a one-day frame. Therefore, there is evidence to suggest a short position for the Mexican Peso.

However, what makes MXN/USD extremely difficult to read is the presence of patterns 2 and 3. Pattern 2 is shows a bullish triple bottom indicating a push towards the upside (and this was confirmed by the level of resistance being broken at the third retest). Furthermore, the red oval (3) shows signs of an inverted head and shoulders formation illustrating momentum push towards the upside. These formations, alongside the longer term EMA and SMA of a 50, 100 & 200 frame, demonstrate a buy position with the currency and therefore questions the overall ambiguity of what stance to uptake with MXN/USD. Even the oscillators such as RSI, Stochastic %K and Ichimoku Cloud Base Line have a neutral stance so it seemingly appears that one’s school of thought and preference of a long-term or short-term trend will dictate the stance of the trader.

Outlook:

I would personally hold a neutral stance on MXN/USD in the short run until an accurate picture of the exit polls is painted. The technicals currently favours a downtrend, but such is the level of speculation and volatility expected from the Presidential Election, any technical analysis to date can be ignored. Figure 2 below verifies this through the vastly fluctuating Stochastic RSI. It is worth acknowledging that Biden is seen as a smoother candidate in regard to political and trade relationships, as well as boosting risk sentiment and subsequently the Mexican Peso, so we can expect to see USD/MXN heading towards pre-covid levels once the health situation stabilises if Biden prevails. Thus, in the long run, the aforementioned fundamental and technical analysis would make me more inclined to enter a buy on MXN/USD if the Democrats succeed.

Figure 3

Jargon Buster:

1. Rising Wedge: A rising wedge is a technical indicator, suggesting a reversal pattern frequently seen in bear markets.
2. Pip: Pip or ‘Price Interest Point’, is a standardised unit and is the smallest amount by which a currency quote can change. It is usually 0.0001 for U.S. Dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point. This standardised size helps to protect investors from huge losses. For example, if a pip was 10 basis points, a one-pip change would cause greater volatility in currency values.
3. Stochastic Oscillator: The stochastic oscillator is range-bound, meaning it is always between 0 and 100. This makes it a useful indicator of overbought and oversold conditions. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold.

References

1. Pending-USDMXN-Technical-Forecast-MBTS9.html [Accessed 2 Nov. 2020].
2. Anon, 2020. Mexican Peso/ US Dollar. [online] TradingView. Available from: https://uk.tradingview.com/chart/ZAFRBNzd/ [Accessed 2 Nov. 2020].
3. Anon, 2020. USD MXN Technical Analysis – Investing.com UK. [online] Investing.com UK. Available from: https://uk.investing.com/currencies/usd-mxn-technical [Accessed 3 Nov. 2020].
4. Anon, 2020. USD/MXN – Live Rate, Forecast, News and Analysis. [online] Dailyfx.com. Available from: https://www.dailyfx.com/usd-mxn [Accessed 3 Nov. 2020].
5. Boutros, M., 2020. Dollar vs Mexican Peso Outlook: USD/MXN Breakout Pending. [online] DailyFX. Available from: https://www.dailyfx.com/forex/technical/home/analysis/us_dollar_index/2020/09/28/Dollar-vs-Mexican-Peso-Outlook-USD-MXN-BreakoutAs-coa.org. 2020. U.S. 2020: Joe Biden And Donald Trump On Mexico Relations | AS/COA. [online] Available at: <https://www.as-coa.org/articles/us-2020-joe-biden-and-donald-trump-mexico-relations&gt; [Accessed 8 November 2020].
6. CNNMoney. 2020. These Are America’S Top Trading Partners – Cnnmoney. [online] Available at: <https://money.cnn.com/interactive/news/economy/how-us-trade-stacks-up/index.html&gt; [Accessed 8 November 2020].
7. Csis.org. 2020. The Covid-19 Pandemic Threatens Mexico’S Economy. [online] Available at: <https://www.csis.org/analysis/covid-19-pandemic-threatens-mexicos-economy#:~:text=Banco%20de%20Mexico%20estimates%20that,significant%20pressure%20on%20public%20finances.&text=The%20predicted%20economic%20contraction%20in,than%20any%20previous%20economic%20crises.&gt; [Accessed 8 November 2020].
8. Markets.ft.com. 2020. MXNUSD FX Cross Rate – Compare Foreign Exchange Rates – FT.Com. [online] Available at: <https://markets.ft.com/data/currencies/tearsheet/charts?s=MXNUSD&gt; [Accessed 8 November 2020].
9. The Balance. 2020. More Americans Immigrate To Mexico Than Vice Versa. [online] Available at: <https://www.thebalance.com/mexico-s-economy-facts-opportunites-challenges-3306351&gt; [Accessed 8 November 2020].