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The 18 level in the USD/MXN pair is a major area that I will be watching as a potential entry region to the down side.
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The US dollar has been very strong against the Mexican peso during the trading session on Thursday as we continue to see a lot of noisy behavior.
Quite frankly, when you look at this currency pair you can see that the 18 level is significant resistance and we have tested it a couple of times. If we can break above there it would obviously be a huge turn of events and possibly a trend change.
That being said, I think that if we can break above there then I think it opens up a major risk destruction currency move and that probably has the US dollar gaining not only against the Mexican peso but against multiple other currencies around the world.
Economic Leverage and Carry Trades
That being said, if we rally a bit and show signs of exhaustion like we have multiple times, then it could open up the possibility of shorting this pair. Keep in mind that you get the massive interest rate swap working in your favor as the carry trade would kick off yet again.
Keep in mind that there is a certain amount of risk that needs to be in the market in order to take advantage of these smaller currencies, but with this being said, it’s likely to keep in mind that the Mexican economy is highly levered to the US economy. So if the US economy does fairly well, then you have a situation where the Mexican economy ends up being a big benefactor and you see a lot of strength in the Mexican peso as not only do you get paid to hold the Mexican peso but you also have the reality that more money flies into that country.
We’ve been in a downtrend for quite some time, but the 18 level is my red line in the sand, so we’ll have to see.
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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.
