The Mexican peso rose about 0.20% against the US dollar on Monday, with USD/MXN at 16.99 after touching 17.04, even as the US-Iran conflict lifted energy prices and pushed US bond yields higher on speculation of tighter Federal Reserve policy. West Texas Intermediate moved above $85.00 following strikes by the US and Iran, while the US Dollar Index (DXY) fell 0.25% despite weaker risk appetite, indicating broad-based selling of the Greenback in FX markets.
Last week’s move went the other way: hawkish remarks from Fed Chair Kevin Warsh helped lift USD/MXN 0.38% to a 17.03 close on Friday, and Prime Terminal data showed markets pricing a 25 basis point rise at the 16 September meeting, with odds near 65%. Attention now turns to US ISM Manufacturing and Services PMIs and August Nonfarm Payrolls, while Mexico’s calendar includes August Consumer Confidence on Thursday and ongoing USMCA talks. Technically, spot at 16.9994 remains below a 17.0838 downtrend line and the 50-, 100- and 200-day SMA cluster around 17.3004, with RSI at 38.8; resistance sits near 17.08, then 17.30 and 18.12.
Trading Strategy for the Current Downward Momentum
We should exploit the current downward momentum in the USD/MXN pair, which is trading near the 16.99 level and remains capped under its key moving averages around 17.30. Given that the Relative Strength Index (RSI) is at a bearish but not oversold 38.8, we recommend derivative traders focus on buying short-term USD/MXN put options. This strategy allows us to benefit from the steady descent toward multi-month lows without exposing ourselves to unlimited risk if the market suddenly turns.
With a 65% chance of a Federal Reserve interest rate hike on September 16, we must prepare for sudden spikes in US Treasury yields, which have recently climbed above 4.2% on inflation worries. However, because West Texas Intermediate (WTI) crude oil has surged past the $85.00 threshold, Mexico’s status as a major oil exporter provides a strong cushion for the peso. We can offset the cost of our puts by selling out-of-the-money call options near the 17.08 resistance line, capitalizing on the high-yield carry trade supported by Banxico’s double-digit interest rates.
Risk Management Ahead of Key Events
We must also stay highly cautious ahead of the critical USMCA trade reviews and the upcoming Mexican Consumer Confidence data release. Historical trade negotiations have shown that political friction can easily trigger 2% to 3% daily swings in the peso, especially with US reluctance to easily extend the agreement. To navigate these looming events over the coming weeks, we suggest limiting our positions to short-dated options expiring right after the mid-September Fed meeting.
