The NAFTA Cross: CAD/MXN

Since NAFTA went into effect January 1994, CAD/MXN rose to prominence and named the "NAFTA Cross" due to exchange rate sensitivities to bilateral trade and Immigration.

At current 15.88, CAD/MXN trades at lifetime highs since 1960. In November 2016, CAD/MXN traded 13.68 and 16.68 January 2017. At NAFTA passage from monthly averages, CAD/MXN traded 2.73 and 23 years later, now trades at 16.00's. On a 1 year basis, CAD/MXN traded to lows from 12.93 and highs at 16.58 for a 28 % difference from lows to highs. CAD/MXN price on a 1 year basis varied 3.9% and 4.07% in MXN/CAD. In 1960, CAD/MXN traded at 0.01 while MXN/CAD traded 76.08 and now 0.06 to achieve lifetime lows.

To understand CAD/MXN volatility, the ultimate market risk barometer and Commodity cross CAD/ZAR traded in the past 2 years from 9.0 to 11.00 highs and EUR/JPY as most widely traded risk asset every year since 2001, traded from 116.00 to 141.00. CAD/MXN volatility is running almost 2 times its market risk asset barometers to reveal far more is going on than normal market movements and its the Mexico side offering such volatility.

Former Institutional Revolutionary Party President Zedillo now threatens to file WTO complaints regarding Trump's "Border Tax" which may in actuality become a transfer tax other than on products such as a Visa Tax and tax on border crossing by persons. Vicente Fox another former IRP president again hailed invectives towards Trump for his pay for the wall actions.

The reminder in this trade scenario is Trump's goal is to bring back American car companies to American soil. Possibly Zedillo and Fox should focus on Honda, Nissan and Toyota for manufacturing plant establishment in Mexico and the US. Zedillo and Fox both presided over NAFTA as presidents from 1994 to 2006 but NAFTA and multilateral trade deals began in 1947 under GATT, are now moving towards strict bilateral deals.

As Mexico growth is tied to the US business cycle, austerity and tax increase measures are coming to Mexico for the first time in 9 years based on Mexico's September budget release. As new Finance Minister Meade highlights, Mexico will cut spending 1.7%, 240 billion Pesos, 13 billion USD or factored to 1.2 % of GDP.

GDP is forecast at 2% to 3% for 2017 and 2.5% by end 2018 however under a volatile MXN exchange rate and as public disputes rise further, forecasts may change radically and particularly when USD/MXN was budgeted to 18.2. USD/MXN now trades 20.89. GDP in Q3 2016 was 2.0 against current unemployment at 3.6%, Industrial Production minus 0.6 and negative credit rating outlooks by Fitch, Moody's and S&P.

Bank of Mexico Carstens highlights in a recent speech Inflation was below expectations for 17 consecutive months but began to show a slight increase in October 2016 based on higher oil prices in the US and from exchange rate dynamics. Inflation target by Banxico is 3%.

The 10 year yield traded November 6.22%, gapped to 7.20 and trades January at 7.81. Mexico's overnight rate TIIE traded December 5.85, November 5.34 and January 6.15. Cete 28 day government auctions traded November 5.15, December 5.84 and January 5.77. February 2016, Mexico's main interest rate was raised to current 3.75 at the same time Banxico sold 2 billion USD. USD/MXN on the day dropped about 4%. All interest rates are extraordinarily high.

Banxico again intervened to rescue the exchange rate January 5th by selling $1 billion or 1 Yard of USD. The Foreign Exchange Commission in Mexico drives and decides MXN interventions and normally lays out policy long before actual interventions. But MXN is in current extraordinary circumstances. Banxico last intervened Feb 2016 and prior to 2016 was 2011 at USD 351 million.

CAD/MXN is far more overbought than MXN/CAD. CAD/MXN currently sits above vital break points at 15.62 and 15.19. MXN/CAD sits just below vital break points at 0.0659 and 0.0641. Any uptrend and lasting in MXN/CAD must break 0.0780.

USD/MXN from 20.89 is far overbought and must break 20.65 and 20.25. MXN/USD is oversold from current 0.0479 and must break above 0.0485 and 0.0495. Expect much volatility to continue.

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