I wrote a piece a few weeks back on using the USDMXN rate as a proxy for the US elections. Someone asked for more insight so here’s a piece aimed at the beginner trader to give some further detail about why we’re watching it.
So here’s a view of the US election via the medium of the US Dollar vs Mexican Peso foreign exchange rate.
A brief insight into charts:
The chart is made-up of Japanese Candlesticks. Each candle is one day in the stock market. We use these Japanese Candlesticks to represent price action because they give us psychological insight into how the markets is working and feeling. A green candle is bullish (the buyers won the day) and a red candle is bearish (the sellers won the day). Think of it like notes on a sheet of music. Individually they don’t mean too much, but once you learn all the notes it starts to sing to you.
In an FX rate when the primary currency is gaining in strength (demand) then the chart goes up (when price goes up US Dollar is gaining in strength vs Mexican Peso weakening).
When Trump is doing well the USD goes up and the Mexican Peso get sold off heavily (because investors fear of what Trump will do to the Mexican economy if he goes ahead and tries to build a wall).
Relevant chart points:
1. USDMXN rate starts going up at start the start of September when Trump starts to overhaul Hillary in polls and then her poor health becomes known to the American public (the networks had been hiding it from the domestic audience)
2. The big bearish red candle at the top is what happened during the first US presidential debate – Trump did poorly, Hillary was deemed to have won and the USD sold off and the Mexican peso gained in strength when it looked like Hillary was going to win.
3. Price continues to slide down as the media orgs release bad news about Trump. When the Trumpgate video comes out on the Friday night post the market close then when the market re-opens in the Pacific on Sunday night price gaps down as the USD selling is underway and Mexican Peso buying is so heavy. The thing about gaps is that nature abhors a vacuum and price always comes back to fill a gap in the market. Always.
4. That night also ran into the 2nd Debate and markets deemed a Hillary win – but now where near as strongly as her performance in the first debate.
The interesting element is that despite Trump having a terrible last 7 days the price has just gone sideways – it’s in a consolidation pattern. I have told clients that if price breaks lower and holds below the 18.70 level then Clinton has it in the bag. However if price started getting back above 19.50 then I’d be getting worried as a Clinton supporter.
The reason this is so important is that it carries much more value than media pieces. Why? Because a media piece is just all talk. Here someone is actually putting their money where their mouth is – they tend to only do that when they have high confidence of a result. Or they have insider knowledge. That’s why markets people are watching the USDMXN rate so closely.
Here endeth the lesson.