- The US dollar has been all over the place against the Mexican peso during the month in a fairly tight range.
- The 17.50 level has offered significant resistance during the month of May and is an area that there has been a lot of noise previously.
Keep in mind the interest rate differential continues to favor the Mexican peso, so I do favor the downside, but I also recognize that there seems to be a massive amount of support at the 17.20 level. Anything below there could threaten the 17.0 level, but I'm not necessarily expecting that to get broken.
If it does, it could open up a move down to the 16.50 level, but as things stand right now, I think the markets don't really know what to do with the action in the interest rate markets and of course the fact that although the interest rate situation in Mexico is much stronger than it is in the United States, the reality is people are a bit concerned about the Middle East and potential supply chain issues from there.
Economic Dependencies and Risk Appetite
I do think that North America is somewhat isolated and insulated from the problems in the Middle East and clearly the markets have behaved as such, but if the US economy starts to slow down that puts undue pressure on the Mexican economy as Mexico is the largest exporter to the United States.
On the other hand, if we do see a rapid resolution to the situation in the Middle East, we could see the Mexican peso attract attention as traders will go a little further out on the risk appetite spectrum to find higher yields.
Ultimately, I still like selling the USD/MXN pair. If the US dollar really starts to strengthen, I'm more of the mind to buy the dollar against other currencies that I won't have to pay the swap in.
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