Starting to Heat Up South of the Border

Key News

Quotable

“The Belief that man is outfitted with an immortal soul, differing altogether from the engines which operate the lower animals, is ridiculously unjust to them. The difference between the smartest dog and the stupidest man—say a Tennessee Holy Roller—is really very small, and the difference between the decentest dog and the worst man is all in favor of the dog.”

                             H.L. Mencken

FX Trading – Starting to Heat Up South of the Border
Yesterday, Mexican industrial production slid by 7.3% year-over-year in August, worse
than the expected 6.2% decline and the previous drop of 6.5%. And in a sign that
companies aren’t yet ready to apply capital in this economy, gross fixed investment
plunged by more than 14% in July when estimates were calling for a drop of 11-12%.

Friday, Mexico’s central bank wraps up a meeting on monetary policy. They’re expected
to sit tight with rates at 4.5%. What’s on their minds?

First, the continued poor economic data isn’t sitting well. Keep in mind 80% of their exports are sent to the United States. And while there may be signs of recovery in the US, America is expected to lag the rest of the world and the US consumer is still retrenching. The most recent monthly data shows Mexican imports to the US down nearly 30% year-over-year.

Mexican exports to the US, year-over-year percent change

On top of that, crude oil revenues are down. And it’s no secret that Mexico makes a living on production and distribution of crude. Relatively low prices and lackluster
demand is an awfully discouraging combo. Mexican government, like many governments around the world, is left scurrying around to compensate for lost revenues.

Mexican exports of crude oil

Mexican exports of crude oil, year-over-year percent change

Money sent back into Mexico from Mexicans working in the US or abroad continue to
show notable year-over-year declines.

It’s obvious looking at these charts that there’s been a major setback to Mexico’s
economy in the wake of global credit crisis.

That is why there are important reforms being weighed by Mexico’s politicians. The
lower house is currently chewing on a proposal that would institute a new 2% sales tax
on pretty much everything. Time is winding down but it is expected some alternate
proposals based instead on spending cuts will surface before next week’s deadline to
make a decision and pass it on to the Senate.

Are these proposals, if any make it through, going to save Mexico’s economy? It’s not
likely. But what is being hoped for is that taking some type of action can postpone
potentially worse conditions long enough for the global economy and business as usual
to get back on its feet.

As for the peso, at least it hasn’t been the self-proclaimed “hindrance on the economy”
as rising currencies of other nations have become. Nope – the Mexican peso has been
pretty much stuck trading sideways for the last couple months, rising and falling from
support and resistance.

It’s nearing support again. And if it’s judged on its fundamental backdrop then the likely
move for USDMXN is for the peso to weaken and this pair to bounce back up towards
resistance.

But, if the US dollar falls into crisis-mode (or is at least viewed that way by traders) then
the peso could find default strength and this pair could blow through support fairly
easily. If it does, and the anti-dollar move is sustained then the pent-up momentum in
USDMXN could send the pair lower in a hurry.