It’s been a positive week for trade sentiment. Earlier in the week, the USMCA was signed which paves the way for US, Canada and Mexico to move forward on trade. And during the US session, President Trump teased traders with hope of a US -China trade deal by tweeting “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Within hours, reports surface that US and China have agreed to a phase one trade deal and averted the latest wave of tariffs which were to be unleashed on China on Sunday. The yen broadly weakened and markets were quick to revert to risk-on.
Meanwhile, the British pound jumped sharply higher when exit polls showed the Conservative Party are on track for a landslide victory. With 368 seats pencilled in for Bojo’s majority government, it surely paves the way for a slick Brexit and reports have surfaced that they plan to move on Brexit next Friday. Whilst the official results are yet to be confirmed, it is already looking like a blood bath for the Labour Party with exit polls once again looking quite accurate.
Commodity FX (AUD, CAD and NZD) were quick to react, with the yen also broadly weakening due to the clear risk-on status of markets. Moreover, E-mini futures are at record highs and GBP/JPY has shot higher on the added benefit of a likely conservative win in the UK elections.
A clear beneficiary of the USMCA is the Mexican Peso. USD/MXN tested a 4.5 month low earlier in the session but has found support around 19.00. Whilst it has fallen -3.3% since the November high, there could be further downside after a potential retracement, given prior declines have fallen -4.6% and -4.3% respectively.
Furthermore, a larger head and shoulders reversal could be in play which, if successful, projects a target near the 2017 lows around 17.50. Admittedly, we’d typically want to see a H&S following a bullish trend, yet if we truly are seeing a turnaround in global trade sentiment, this is certainly a pattern to consider. Still, the pattern could already be in play, we’d prefer to see a break beneath the 2019 lows before assuming a major reversal is indeed underway.
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