Trump Tweets – Peso Plunges

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Trump tweets of taxes at the southern border and the Peso plunges. Mexico has abundant petroleum, cheap labor and a preeminent location for global companies to reach the largest consumption market in the world. Yet they struggle with slow growth and massive corruption. To add insult to their injurious system, Mexico’s worst nightmare has now been elected next door with a vow to tax Mexico, penalize potentially any factory that locates there and to reverse the tide of illegal immigration. Not surprisingly, the Bearish sentiment is rising over the plight of the Peso as Trump tweets promise to indirectly punish their currency further in 2017. Look for depreciation of the Mexican currency (MXN) down to 23 to 24.4 per dollar (.0435 – .041 dollar/peso) with resistance near 20.

Mexico is clearly one of the most affected followers of Trump Tweets as illustrated in the chart below.

peso-1-17

For over 18 months the Peso has been persistently falling to new all-time record lows, down almost 90% from levels of 2 decades ago and 15% since Trump’s election. During the Oil induced currency collapse over the past 2 years, major investment funds have reached levels of extreme pessimism (short hedges) allowing for several 2 to 3-month rebounds during the Peso’s secular decline. With Trump’s election and growing anti-Mexico trade threats sending a renewed shock-wave into Mexico, we are once again approaching a temporary support zone. A further Peso waterfall into the 0.041 – 0.044 zone may be enough to increase Commercial Spec positions to net longs of One Million contracts (& Large Spec shorts of 1 Million), from which we would expect a rally back into a couple month trading range. It will be interesting to see if President Trump tweets as vociferously and habitually as President-elect Trump.

mexican-peso-1-17

Trump has vowed to build a wall, stop immigration and send hoards back across the border. He has threatened the US and foreign companies having facilities in Mexico for exporting back to the US. One should ponder how he would feel if Germany or the UK said no American cars or appliances can be sold there unless made in those respective countries? Is he OK with US Oil companies investing Billions in Mexico to reap profits?  Trump’s lapsus linguae “could” be boastful barking without the bite and may very well be a near-term benefit for US labor and the economy. If actually embraced, these Trumpian twitter implementations will be an anti-free trade disaster in the long run.  This mercurial President could be bluffing to some degree, but Fear in Mexico is likely to keep rising, depressing the Peso.

If Trump wasn’t alarming enough to Mexico, now they have to worry just as much about political instability over the populist anger of their own citizens rioting over surging gasoline prices. Mexican energy deregulation is good, but the resulting 25% overnight surge in gasoline prices is unfortunate timing. The 71 Pesos ($3.30) for 4 liters (about a gallon) is almost as much as Mexico’s just raised minimum wage for an entire day’s work — 80 pesos ($3.72).  Impoverished Mexicans feel sticker shock from a $1/gallon jump in gas prices at the pump overnight. Hundreds of stores have been looted, hundreds of more looters detained as Mexico is paying a price, even before Trump can start building real and metaphorical walls.

mexico-gasoline-prices

Mexico’s Pemex monopoly “only” exports their ever-shrinking supplies of crude oil to the US.

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While the US is exponentially increasing exports of Natural Gas and refined gasoline into Mexico.

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Despite this huge energy trade balance reversal giving the US a net $12 Billion petroleum surplus with Mexico, NAFTA has turned the aggregate US trade balance from a small surplus in 1994 to a $60+ Billion deficit today. Despite NAFTA’s susceptibility to foreign transshipment and dumping into the US, the energy sector south of the border is untapped and in desperate need of US capital and expertise. A silver lining for Mexico is the recent breakup of their Pemex state energy monopoly that has opened the flood gates for Billions of US dollars to invest and develop tired offshore fields over the next 4 years. The 11-year energy production crash will bottom in 2017 and increasingly support the Peso by 2018.

mexico-oil-output

Look for continued assaults by Trump on NAFTA and all foreign manufacturers in Mexico as well as aggressive immigration efforts that will harm the Peso in coming months with periodic 2 to 3-month recoveries over the next year. During the 1st half of 2017 look for resistance Sells in the 0.047 to 0.050 $ per Peso zone and support Buy signals in the 0.041 to 0.0435 area.

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About Kurt Kallaus

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