The US dollar rallied quite significantly during the trading session on Tuesday as it looks like we are facing the possibility of trying to break out above the 50-day EMA.
Even if we did then the 17.50 level is more likely than not going to be targeted. The 17.50 level is an area that I think a lot of traders will be watching very closely and signs of exhaustion I think will be sold into.
If we can break above the 17.70 level, then we probably have the next wave higher.
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Interest Rate Differential and Economic Influence
The 1 thing that's different about the USD/MXN pair than many others is that the interest rate differential favors the currency against the US dollar quite significantly. Because of this most people will look at this through the prism of trying to pick up that carry trade swap at the end of every day.
But I also would point out that the US economy is a major influence on what happens with the Mexican peso as Mexico is the number 1 exporter into the United States. So, the better America does ironically the better the peso does against the US dollar.
As things stand right now, we are in the midst of forming a bit of a double bottom. We'll see if we get a bigger pop to the upside.
But I'm willing to fade signs of exhaustion, especially near the 17.50 level in order to try to take advantage of the longer term trend.
If we don't see the market continue to the downside there then I might try it again at the 200-day EMA.
It is very rare that I jump in and buy this pair because of the interest rate differential. So basically, if I'm looking to short the dollar this is a great market for that generally speaking. But trying to buy the dollar I can do that against currencies and get paid to do it unlike here in the Mexican peso.
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