A few weeks ago we saw the exchange rate confirming above the 975 peso zone, making us think about going to the 995-1,000 peso resistance zone (tested last year). A mismatch with comparables (both in regional currencies and the Euro leaving the 1.07 zone in the current vicinity of 1.1) that continues to deepen, confirms that the flow of buying continues to dominate, despite both Central Bank and Treasury sales.

A large proportion is explained by external buying flows, which continue to be motivated by the rate differential with speculation of further tightening, dismissing stronger than expected economic data (which at least should have slowed the pace of the fall in local rates), and when we are moving into the second half of the current government, which by all accounts should have a more pro-market shift, paving the way for inward flow of sales.

At the current levels of 985 pesos, which is in the vicinity of the target resistance zone mentioned above, it gives the impression of an increasingly extreme misalignment from a fundamental point of view. This is where we have to establish the milestones that give us evidence, ideally in two phases, of an eventual change of trend: the first is the loss of current acceleration, together with the failure to register new highs after having corrected to 960 (which is chartist and moving average modeled for short term cycles).

A second phase that should be decisive is a drop below 955-950 pesos, which would be enough to prove that the uptrend is over, scenario that is still pending. This viewin our opinion, should occur prior to when the spread local vs. dollar rate spread stops compressing, as the market tends to anticipate this.

In conclusion, we recommend taking advantage of the current volatility to go long, as long as we do not enter the so-called second phase. However, in the event of a breakout of the key zone detailed above, it would be a change of trend, in view of which we recommend to Exit all long positions, as this extreme mismatch should return with equal force, tending to levels close to 800 pesos in the medium term.

Gustavo Gallardo Casal, CMT
Sales & Trading Assistant Manager