Is the Canadian Dollar a Buy Soon against the Mexican Peso?

cad mxn

The Canadian dollar has depreciated by 7.5% against the Mexican peso so far here in 2018.  The political risks in Mexico are substantially more than in Canada.  We look for the Canadian dollar to begin recovering soon.  Here we lay out the logic and strategy. 

This chart, composed on Bloomberg, shows the Canadian dollar against the Mexican peso since the start of last year.  There have been three big moves.  The Canadian dollar trended lower against the peso as it corrected from the sharp sell-off induced in great measure to the candidate Trump’s rhetoric against Mexico.  However, shortly before the inauguration, the peso began recovering continued through H1 17.

In Bank of Canada hiked rates twice in Q3 17 and this helped fuel the Canadian dollar’s recovery in H2.  In Q4 17, the Mexican peso, alongside other emerging market currencies weakened.  The Canadian dollar reached a high in early 2017 near MXN16.706, and weakened to nearly MXN13.39 before rebounding to nearly MXN15.75.

Since the start of the yen and through today, the Canadian dollar has fallen about 7.7% against the peso.  Both countries face political risk emanating from NAFTA negotiations, which some argue that the planned US tariffs on steel and aluminum without exempting Canada and Mexico, raises the odds that NATFA collapses.  However, Mexico also holds elections in July and the Left candidate, known by his initials AMLO is running ahead in the polls.

Following last year’s two hikes, Canada has already hiked rates once this year and another hike is looking likely at next month’s meeting.  The Bank of Canada meets on Wednesday this week.  Governor Poloz may talk about the risks from the US tariffs and NAFTA, but still seems to be committed to continuing to remove accommodation.  After the May move, the market appears to have discounted about a 50% chance of another hike in H2.

The technical indicators do not rule out new lows and chart support seen near MXN14.35, which is a little nearly 1.5% away.  Indeed, momentum is still moving against the Canadian dollar.  It has fallen for four consecutive sessions through today.  It is being sold through the 200-day moving average (~MXN14.57) today for the first time since last September.  Some see Canada as more vulnerable than Mexico to US steel and aluminum tariffs.  The RSI is low (~32) and approaching last November low near 29, which was the lowest since March 2017.  The MACDs have flat lined below zero and appears to need a small advance in spot to turn up.  The Slow Stochastics began turning higher in the last full week of February and have not confirmed the recent new lows.

Speculators in the futures market are net long about 22k Canadian dollar futures contracts, which is among the least in the past nine months.  Speculators are net long 92.5k peso futures contracts.  It is near the year’s higher and the upper end of positioning in the past six months.  When the market does correct, the speculative positioning indicates that peso (gross longs 120.1k contracts) may be more vulnerable than the Canadian dollar speculators.

We look for a place to buy the Canadian dollar against the Mexican peso.  We do not want to try catching a proverbial falling knife.  However, we look for two developments to encourage our trade idea.  First, for money management purposes it would be helped to get closer to MXN14.35-MXN14.40.  Second, we will patiently look for a reversal pattern that would provide a technical signal that this year’s trend is set to reverse.