FxWirePro: Focus on MXN ahead of NAFTA bilateral announcements and option strategy

After the election, we expect MXN strength as the environment rewards high-carry currencies with reduced uncertainty. We recommend hedging MXN exposures in the short-term but expect renewed foreign interest in 2H’18.

There is talk that part of the NAFTA deal, between the US and Mexico, is close at hand (potentially Thursday). The US administration will announce the breakthrough in the bilateral NAFTA negotiations with Mexico, sources report. The hopes of an end to the uncertainty supported the Mexican peso and also the Canadian dollar in the early hours, as this would pave the way for joint negotiations of all three NAFTA parties.

The office of the US trade representative Robert E. Lighthizer and the Mexican government denied reports about an agreement, thus causing a correction of the exchange rate moves. The main focus therefore rests on the meeting between Lighthizer and the Mexican State Secretary for the Economy Ildefonso Guajardo planned for today. 

But even if the US and Mexico manage to overcome the bilateral differences this would make an agreement in the NAFTA negotiations more likely but it would be far from wrapped up. And time is fleeting. The mid-term elections in the US are going to be held in November and on 1stDecember the new President Andrés Manuel López Obrador (abbreviated to AMLO) will take office in Mexico, even if he had recently seemed constructive regarding the NAFTA negotiations. 

We remain cautious, as NAFTA optimism has turned out to be premature all too often in the past. However, that also means that MXN has further appreciation potential if the trilateral negotiations now really lead to a quick conclusion that is acceptable to all. Courtesy: Commerzbank

Trade tips: 18-Oct-18 USDMXN put (18.80), KI = 19.50.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -105 levels (which is bearish), while articulating (at 13:17 GMT). For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex