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Bearish USD/MXN: Post-Brexit Risk-On Rally Likely To Favor EMFX

Bearish USD/MXN: Post-Brexit Risk-On Rally Likely To Favor EMFX

2016-06-30 17:35:00
Tyler Yell, CMT, Currency Strategist
Share:

Point to Establish Short Exposure: Stop Sell Order on Break < 18.000

Spot: 18.44

Target 1: 17.1000 April 29 Low

Target 2: 16.500 October – November Price Support

Invalidation Level: 18.85 Friday (Post-Brexit) Close

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Less than a week after the historic vote from the UK to leave the European Union (also known as Brexit), risk assets continued in their second largest Bull market in history. The FTSE 100 (CFD: UK100) was trading above its pre-Brexit high on Thursday before Mark Carney, Governor of the Bank of England warned that they would likely need to ease monetary policy this summer. The Bank of England Governor’s announcement helped further propel assets like equities, emerging markets, and some commodities.

Later on Thursday, there was a source from the European Central Bank, who noted that the ECB might be looking to expand their QE as the number of assets they were originally limited in buying may soon hit its upper limit due to the implications of the Brexit vote.

While this may seem like an odd way to begin a trade idea about USD/MXN, it paves the way for a clear theme, Quantitative Easing that supports Emerging Markets is alive and well, and may, in fact, be expanding. Such an environment could help bring further appreciation for non-Central and Eastern Europe, Middle East & Africa (CEEMEA FX) currencies like the MXN.

Lastly, we’ve seen the market push out expectations of the next Federal Reserve Rate Increase. Historically, higher interest rates tend to put pressure on Mexico’s economy and weaken the Peso. Therefore, lower for longer may be a nice boon to the Peso vs. the US Dollar as G4 Central Banks continue to look for ways to stimulate global growth.

USD/MXN May Have Seen a Double-Top On The Post-Brexit Fears

Bearish USD/MXN: Post-Brexit Risk-On Rally Likely To Favor EMFX

Key Technical Levels:

USD/MXN – Trying To Break Through Important Support of ~18.000

2nd Resistance: 19.54 Weekly R1 Pivot

1st Resistance: 18.85 Friday (Post-Brexit) Close

Spot: 18.44

1st support: 17.1000 April 29 Low

2nd support: 16.500 October – November Price Support

Trade Setup:

I am looking to sell USD/MXN at the market with a stop above the close of Friday (Post-Brexit) at 18.85 should USD/MXN break below the late-May low of 18.00. Initial targets currently sit at 17.100 and would be followed by a move down toward the late-2015 lows of ~16.5000. A trailing stop would be used above an opposing up-fractal on the daily chart. The trade is aligned with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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