FxWirePro: Short hedge for short-term USD/MXN traders as Banxico to line up with dovish league

Tonight the Mexican central bank will leave its key rate unchanged at 7% once again. The fall in GDP in Q3 is due to the earthquake and tornados so that there is no reason for the central bank to react to the GDP data with rate cuts, it would not have scope for those anyway due to inflation rates. The latter is likely to have remained around 6% again in October (publication today), even though it is likely to have peaked slowly now and should ease towards the central bank’s target again (3%) next year.

As a result, many observers expect the central bank to initiate a rate cut cycle in mid-2018. We are skeptical though. The recently weaker peso might delay the process of disinflation. The renegotiations of the NAFTA agreement and US monetary policy also point towards peso weakness. In the run-up to the Presidential elections in July 2018, we may also see some pork barrel legislation which may keep inflation rates elevated for longer.

As a result, the central bank may leave rates unchanged for longer. If the NAFTA negotiations were to fail the central bank may even have to implement emergency rate hikes to weaken the depreciation pressure on the peso. However, the following applies for today: the meeting is unlikely to provide any surprises and should, therefore, be a non-event for the peso.

After a brief correction in the major trend of USDMXN, the Bulls resume their business by bouncing back in the previous month owing to the Fed’s rate hiking signals but this bounce is not confirmed by both leading and lagging oscillators. So, it is unwise to draw the bullish calls in an isolation, consequently, this has been evident in this month’s price action again. The price slumps are visible and likely to prolong further (observe both daily and monthly plotting).

If you have to observe the short-term technical trend of this pair, bearish sentiments have been mounting and slumps are most likely to test next strong supports at 18.90 levels.

While both leading & lagging indicator to substantiate bearish stance, MACD remaining in bearish trajectory does not substantiate this standpoint but this would be deemed as indecisiveness in current rallies.

RSI converges to the ongoing price dips as this leading oscillator trending below 57 levels which is a clear early signal for aggressive bears, the same has been the case when you’ve to plot daily charts, it signals weakness as it evidences %d crossover which is again a bearish indication. This confirms the bearish momentum in short-term selling sentiments.

Hence, we recommend shorting rallies on hedging grounds and decide to initiate shorts in futures contracts with the near-month tenor.

Well, at spot reference: 19.0860, contemplating lingering bearish indications, on hedging grounds we recommend shorting near-month month futures as the underlying spot FX likely to target southwards firstly at 18.90 in near run and upon the breach below these levels 18.4151 levels is also a probable event.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.