USD/MXN Hit 21.18 Amid Trump Threats, FOMC Minutes In Focus

Forex News and Events

Mexican pesos in turmoil

The Mexican peso was hammered yesterday as it fell more than 2% against the US dollar amid Ford’s (NYSE:F) announcement that it will drop its plans for a new factory in Mexico. The car maker has cancelled the construction of a $1.6 billion assembly plant in San Luis Potosi and will instead invest this money in a factory in Michigan. The decision has come on the back of repeated attacks from president-elect Donald Trump against the auto industry, whom he accuses of systematically moving production abroad while cutting thousands of U.S. factory jobs.

Ford’s decision triggered a panic selling of the Mexican peso as investors anticipate that other US companies may follow suit and scale back investments in Mexico. USD/MXN hit 21.1350 in the early Asian session before easing back to 21.02. However, traders are still reluctant to play the retracement as the currency pair climbed to 21.19 in the early European session amid fears that Trump will take advantage of the momentum to pressure more US companies by threatening them with a hefty border tax.

We expect the peso to remain at risk over the next few weeks as the market remains sensitive to any comments from Donald Trump regarding his trade policy. However, the market is currently in overreaction mode, which does make a retracement highly likely. The question is: how will it take for the market to switch direction?

Fed minutes to provide a hawkish tone

Markets are awaiting the release of the December Fed meeting minutes tonight. Traders are unlikely to change their views on the US economy and in particular the dollar, which remains strong against major currencies. There are also strong expectations this year regarding rate normalization.

However, in our view, we definitely think that there is room for further disappointment as we still find US data to be somewhat overestimated. For the time being, the chance of two rate hikes in 2017 currently stands at 33% and there is still also, according to the Fed Funds Futures, a 25% likelihood of three.

In the minutes, traders should not expect to see the specific rate hike path that the fed will follow. This year’s hot topic will be the fiscal stimulus that Trump is promising and of course inflation. We are certainly at a reflection point and alternatives to stimulate the economy are being seriously considered.

Data-wise, US manufacturing beat the forecasts yesterday, improving to 54.7 vs. 53.8 expected. Sentiment on the US economy is improving since Trump’s election despite great uncertainties. We believe that all of this is fragile and that markets are being overoptimistic. It will soon be time to reload dollar bearish positions.

AUD/USD – Bouncing From Support At 0.7145.

AUD/USD – Bouncing

Today’s Key Issues

The Risk Today

EUR/USD‘s momentum is slightly bearish recently. The pair remains below 1.0500. Hourly support lies at 1.0341 (03/01/2017 low). Hourly resistance can be found at 1.0499 (22/12/2016 high). Stronger resistance is given at 1.0670 (14/12/2016 high). Expected to see continued sideways price action in the short-term. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is riding within downtrend channel. Hourly support lies at 1.2200 (03/01/2017 low) while resistance lies at 1.2388 (30/12/2016 high). The technical structure suggests further continued weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY‘s is increasing again but the pair fails to break hourly resistance given at 118.66 (15/12/2016 high). The pair is heading towards the 120.00 level. Hourly support can be found at 116.05 (30/12/2016 low). Stronger support lies at 114.74 (12/12/2016 low). The technical structure suggests further strengthening. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is consolidating and remains above 1.0200 which seems a solid base. Hourly resistance is given at 1.0344 (15/12/2016 high). Key support is given at the parity. Expected to further consolidate above 1.0200. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Resistance and Support

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