Good afternoon. The $/MP is currently at 11.6100 and the June future is at 856.00. Today's middle swap rate for the June is .0640.
There has been no significant news out today. The big news was last week. The Fed policy change and the larger-than-expected payrolls number. The key phrase in the FOMC statement was "The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. " This suggests quarter points hikes starting within the next few FOMC meetings totaling 1-2%. What is being left out of much of the media coverage is the fact that the Fed views the upcoming rate hikes as removing stimulus. This is why I put the total hikes in the 1-2% range. I do not anticipate much more than this for a while. Productivity gains should continue to keep down inflation. While inflationary themselves, the higher cost of money and energy should help keep growth manageable. If this is the case, then concern over how much more expensive it will be for Mexico to repay its $142 billion in international debt should recede. The longer-term key to the Mexican economy's and peso's health is needed energy and tax reform.
Longer-term Outlook: While the recent corrective/consolidate action took longer than I had expected, I stand by my long-term target of 12.5000. The market is overbought at this stage. I would not add short peso hedges unless absolutely necessary, but I would be at least partially covered. The 11.1800 to 11.1100 is the closest intermediate-term support.
Shorter-term Outlook: The short-term trend is definitely bullish but the upside is overdone in this time frame as well. One close below 11.4200 turns the S-T trend neutral. Look for support at 11.4400 and 11.3400. The Fibonacci .382, .50 and .618 retracements hit at 11.3500, 11.2400 and 11.1300 [see charts].
My standard hedge matrix is at 90%. One close below 11.4200 shifts my standard matrix to 75%. Basis the intermediate-term, I would be aggressive in adding needed hedges. The outlook is very bearish the peso, but it is overdone. Basis my standard matrix, those with no coverage or new hedge needs should put on 30% coverage immediately. I would add another 15% off of the 11.4400 level and 15% at between 11.340 and 11.3000 levels.
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