Winners in FX Markets After US Presidential Election: CAD & MXN

US Elections’ FX Market Impression: Winners

• Each USD/CAD and USD/MXN charges confirmed important weak point within the rapid response to the US presidential election outcomes.
• The US political and vaccine development information over the previous week have been extraordinarily bullish for the Canadian Greenback and the Mexican Peso, insofar because it means a better chance of resolving commerce tensions.
• As a detailed proxy to USD/MXN charges (20-day correlation of +0.81 and 50-day correlation of +0.84), we are able to look at the IG Shopper Sentiment Index for USD/CAD charges.

Biden Win Normalizes US Commerce Coverage

Democrat Joe Biden has gained the US presidency.While lots of his insurance policies and plans might not come to fruition due to a divided Congress, one space that he can immediately affect, whatever the composition of Congress, is commerce.

Commerce wars have been a hallmark of the Trump period. While a president–elect Joe Biden might not deviate that far on commerce coverage in relation to China past ending tariffs, there’s a affordable foundation of expectation that the Biden advertministration will search to normalize commerce coverage with key allies.

Learn extra: Will Commerce Wars Persist After the US Election?

US’ Buying and selling Companions Have Been Pressured

Among the many international locations on the prime of this checklist embrace Canada and Mexico, the USA’ rapid geographic neighbors. The mix of upper tariffs carried out by the Trump administration and the coronavirus pandemic has hurt the Canadian and Mexican economies considerably. That the USA is within the midst of its worst stretch of the coronavirus pandemic is hobbling Canadian and Mexican economies from totally recovering.

The reliance of each of those economies on the USA can’t be dismissed; the USA is each international locations’ largest buying and selling associate. Greater than 80% of Mexico’s exports going to the USA and 70% of Canada’s exports going to the USA. Roughly 30% of Mexico’s GDP is derived from financial actions involving the USA, whereas that quantity is close to 20% for Canada.

Current Developments Bullish CAD, Bullish MXN

Alongside the information that COVID-19 vaccinesare reaching promising milestones in their improvement, optimism has been abound and progress–linked and threatier currencies have been outperforming. Hope that the USA will quickly be capable of wrangle management of the coronavirus pandemic by widespread vaccination has traders ignoring in any other case alarming COVID-19 outbreak knowledge.

The developments over the previous week have been basically long-term bullish for the Canadian Dollar and the Mexican Peso. A Biden win means chill outed commerce tensions within the type of cut backd tariffs, a extra concerted US federal effort to convey the coronavirus pandemic below management, and extra US fiscal stimulus within the close to–time period that may assist re-invigorate the US financial system (even when the fiscal stimulus is smaller resulting from no blue wave).

These developments and ensuing value motion counsel that the Canadian Dollar and Mexican Peso stand to be winners below a Biden advertministration, whatever the composition of Congress. Already, we’ve seen USD/MXN and USD/CAD rates fall since US election day on Tuesday, November 3. Current technical developments might cater to extra weak point within the pairs forward.

USD/CAD Fee Technical Evaluation: Every day Chart (October 2018 to November 2020) (Chart 1)

Regardless of buying and selling greater in current days, USD/CAD charges proceed to flirt with a break beneath the trendline from the 2016 and 2019 highs, which has coincided in current days with the 61.8% Fibonacci retracement of the 2016 excessive/2017 low vary at 1.3065. Whereas the rebound from assist has seen USD/CAD charges commerce greater by their each day 5, 8-, 13-, and 21-EMA envelope, the transferring averages are nonetheless in bearish sequential order. Every day MACD is holding beneath its sign line, whereas Sluggish Stochastics are simply advancing from oversold territory.

In context of the transfer decrease from the March 2020 excessive, it seems that USD/CAD charges are consolidating in a bear flag continuation sample that will finally produce new yearly lows for the pair within the remaining six+ weeks of 2020.

USD/CAD Fee Technical Evaluation: Weekly Chart (September 2012 to November 2020) (Chart 2)

Massive image: tright here might not be a longer-term upside bias in USD/CAD charges as this narrative is below risk given the breakdown by the rising uptrend from the September 2012 and September 2016 lows. The longer-term view stays a bearish double prime. Failure beneath the trendline from the 2016 and 2019 highs and the 61.8% Fibonacci retracement of the 2016 excessive/2017 low vary would improve confidence in a longer-term bearish view for USD/CAD charges.

USD/MXN Fee Technical Evaluation: Every day Chart (February 2019 to November 2020) (Chart 3)

USD/MXN charges have continued to grind decrease, holding throughout the downtrend going again to the coronavirus pandemic excessive in March 2020. On the each day chart, November has produced recent lows courting again to March, though assist has not too long ago been discovered within the space spanning 20.0000/20.3215, which incorporates two key Fibonacci retracements spanning the 2020 excessive/low vary (gentle pink) and the trailing 10-year excessive/low vary (darkish pink).

Bearish momentum has began to ease within the near-term given the rally from assist. However USD/MXN charges are nonetheless beneath their each day 5-, 8-, 13-, and 21-EMA, which is in bearish sequential order. Every day MACD remains to be trending decrease beneath its sign line, whereas Sluggish Stochastics’ rise out of oversold territory has begun to gradual. It seems that the trail of least resistance is to the draw back for USD/MXN charges.

USD/MXN Fee Technical Evaluation: Weekly Chart (April 2016 to November 2020) (Chart 4)

The continued pullback from the March 2020 excessive means that the triangle breakout skilled in Q1’20 might finally yield to a return to the triangle. To this finish, momentum on the weekly timeframe stays firmly bearish, extra so than on the each day timeframe. USD/MXN charges are beneath their weekly 4-, 13-, and 26-EMA envelope. Weekly MACD is trending decrease beneath its sign line, whereas Sluggish Stochastics are nestled in oversold territory. A pullback in the direction of symmetrical triangle assist close to 19.7300 over the approaching weeks can’t be dominated out, nor can a deeper retracement in the direction of 19.3000.

Monitoring CAD & MXN Positioning

The shut proximity of each international locations, given their commerce relationship with the USA, additionally implies that their currencies are likely to commerce in a similar way as effectively. To this finish, the 20-day correlation between USD/CAD and USD/MXN charges is at present +0.81 and the 50-day correlation is +0.84.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (NOVEMBER 13, 2020) (CHART 5)

USD/CAD: Retail dealer knowledge reveals 69.87% of merchants are net-long with the ratio of merchants lengthy to brief at 2.32 to 1. The variety of merchants net-long is 23.62% decrease than yesterday and a couple of.62% greater from final week, whereas the variety of merchants net-short is 7.04% greater than yesterday and 40.09% greater from final week.

We usually take a contrarian view to crowd sentiment, and the actual fact merchants are net-long suggests USD/CAD costs might proceed to fall.

But merchants are much less net-long than yesterday and in contrast with final week. Current adjustments in sentiment warn that the present USD/CAD value development might quickly reverse greater regardless of the actual fact merchants stay net-long.

— Written by Christopher Vecchio, CFA, Senior Forex Strategist