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The Case for Short USD/MXN

Rareview Macro

Contributor:
Rareview Macro
Visit: Rareview Macro

We view:

  • The 200-day moving average (DMAVG) as a short-term trend change.
  • The 55-week moving average (WMAVG) as an intermediate-term trend change.
  • The 200-week moving average (WMAVG) as a cycle change.

There are many US dollar crosses that have fallen below or are challenging the 200-WMAVG. However, most of them have been oscillating above/below it for quite some time.

The currency cross that stands out or has the “cleanest” moving average break is the US dollar relative to the Mexican peso (USD/MXN).

Weekly are more important than daily closes. Red is more important than blue on a bar chart.

If USD/MXN closed below 19.0344 today, USD/MXN will post its first weekly close below the 200-WMAVG since 2013 on a red bar.

If you incorporate moving averages into your technical discipline, like us, this break lower is a cycle change.

Secondly, today, USD/MXN is set to complete a weekly “reversal pattern” using trendlines.

You can debate the merits of long diagonal patterns or the distance to the apex, but this is the first time a trend line “reversal” has occurred in many years on the weekly chart.  

Below is a chart combining the two technical patterns – 200-week MAVG and weekly reversal.

Here are other ways to think about these technical observations:

  • USMCA is close to being signed;
  • Dollar-Yuan (USD/CNH) is signaling emerging market stability;
  • Real interest rates will not rise materially in 2020 as the Fed is on hold;
  • Short USD/MXN is positive carry, unlike short EUR/USD;
  • Crude oil stability or higher prices should benefit MXN;
  • Long EM vs. short DM in some variation is already the consensus call by sell-side research for 2020.

Conclusion: Expect the “Street” to go after USD/MXN following “weekly” confirmation of a close below the 200-week MAVG.

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