From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar is on the ropes as global currencies bounce back.
After failing to hold its breakout earlier in the month, the USD looks vulnerable against a growing number of currencies.
The pound and euro are catching higher. The Swiss franc is rebounding off its recent lows. And the commodity-centric Australian and Canadian dollars remain resilient.
We can add the Mexican peso to this list, as the USD/MXN cross broke down to fresh 52-week lows yesterday. This breakdown supports the near-term bearish argument for the dollar.
And it also offers a great trade setup.
Let’s take a look.
Here’s a chart of the USD/MXN pair:
While the Mexican peso has chopped sideways since late 2020, we believe the trend is shifting to the downside.
Last week, prices punctured the range lows as the USD/MXN hit its lowest level since the onset of pandemic-related volatility. We can take advantage of this weakness by selling USD/MXN against the 2021 lows.
As long as the USD/MXN is below 19.56, we want to be short, targeting the former 2018 lows around 18.50.
There’s plenty to like about this trade.
Our risk is well-defined at those former lows. The peso is a commodity currency that's held up best against the dollar during the past year.
And the US dollar has struggled against the peso since last fall as it peaked in November and has been trendless since.
If the failed breakout in the US Dollar Index sticks, the dollar is most likely to fall hard against the peso. The USD/MXN has been under selling pressure for months, and now it’s starting to lose its footing.
We think the peso is an excellent vehicle for betting on further dollar weakness in the short term. With that said, we can only be short below our risk level.
