Morning Commentary: Relief Rally – Mexican Peso Soars

Foreign Exchange - Morning Commentary

Relief Rally – Mexican Peso Soars

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Global equities are continuing to rally, and for a change, G7 interest rates are mirroring that near term optimism and rising as well. Part of the catalyst for this “risk-on” move was the announcement late on Friday that the U.S. and Mexico have reached a tentative agreement on border security and the U.S. will not impose tariffs on Mexican exports at this time. The Mexican peso has appreciated by an astonishing 2.65% since Friday’s close.
 
Adding to the favorable risk environment are storylines revolving around a possible meeting between President Trump and President Xi at the G20 meeting later this month which investors hope will jump-start the stalled trade talks. While U.S. interest rates are slightly higher on the session, market expectations remain high for a Fed rate cut in July at or near 83% which is the same probability as when we closed on Friday after the weak U.S. jobs report.
 
Regarding the U.S. dollar, there is an interesting historical perspective today. The U.S. dollar index (DXY) is back to its 200-day moving average again this morning which is where it was on Election Day in November 2016; it is also near unchanged from the November 2016 level despite all the Fed rate increases since that time.
 
Where we go from here is anybody’s guess, but with the potential new dynamic of a Fed rate cut and the U.S. economy falling back to earth, other options might be available for investors. We tend to favor that viewpoint with a gradual weakening of the U.S. dollar as we march toward the end of the year.
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