Updated: Aug 2
Professional Global Macro Trading Overview
Starting the analysis off again with the GDP differentials between USD and MXN. The first thing we’ve identified with the economic indicator (GDP) and the exchange rate is that they’re positively correlated again. Makes sense. Very recently, the GDP gap between the two economies has started to widen suggesting potentially US is growing faster than Mexico or vice versa. If that trend continues, we could see a slight contraction in the exchange rate. But currently, since the GDP differential is still positive at 0.80%, we’ve given it a slight long bias and a relative score of +1.
You may be wondering why we’ve chosen Exxon Mobil as our trade analysis factor. Firstly, let’s go over the exports and imports, the United States exports 11% of refined petroleum to Mexico which accounts for 15% of their total exports. Additional exports to Mexico include petroleum gas, vehicle parts and cars taking most of its export market.
Exxon Mobil Corporation, doing business as Exxon Mobil, is an American multinational oil and gas corporation headquartered in Irving, Texas. It is the largest direct descendant of John D. Rockefeller's Standard Oil, and was formed on November 30, 1999 by the merger of Exxon and Mobil.
Therefore, it’s one of the United States largest oil exporters. This is a great company to analyse against the exchange rate to see the relationship between the two.
Overall, you can see a potential positive correlation forming. Which is quite different to normal stocks against currencies. There’s generally an inverse relationship between USD strength and stocks but for Exxon Mobil over the past 10 years it’s been very positively correlated. For this reason, we’ve given this a relative score of -5, a strong short bias on the two asset classes as Exxon Mobil has decreased in value by over 7% which means the exchange rate could follow as it plots into the extreme bounds of our statistical distribution.
Since we analysed an oil company, we might as well analyse the commodity itself since the US exports quite a bit of it to Mexico. What can we see?
To start things off, straight away we can see an inverse relationship. As the price of oil (in orange) goes up, the exchange rate USDMXN goes down. This can be seen between the periods in 2009-11 and 2013-16. There are clear crossovers in the two assets showing this relationship.
The most recent data is suggesting a potential long, but why is that?
Since they’re inversely correlated it means if the returns of oil are negative, we want to be longing USDMXN not shorting. Therefore, the most recent data of -11% performance on WTI means we’re looking at a very strong long bias on the USDMXN, a relative score of +5. This is a strong indication that oil isn’t performing well at all so the exchange rate should appreciate. As you can see from the distribution analysis -11% falls in the minority cases and is quite extreme in nature meaning a potential volatile environment is underway.
Now, that we covered the major commodity that exports to Mexico. What about some other products? Well, US like to produce a lot of vehicles and vehicle parts which are then shipped off to Mexico for their consumers to buy. One of the top car manufacturing companies in the US being General Motors (GM). That’s why we’ve chosen it in our analysis factor as again cars and car parts account for over 10% of export and imports.
What can we see about the relationship between GM and USDMXN? If we look closely between Jun 2012-13, we can see that GM performed very well whereas the exchange rate took a hit towards the downside. Might not look very impactful in terms of the perspective but the price changed from 13.3573 down to 12.946 which is a big short opportunity back then. Again from December 2013 all the way to 2016 we saw GM share prices drop but the exchange rate did the opposite and increased in value significantly.
What does the recent data suggest moving forwards?
In the past month the share prices of GM have increased by 1.64% which means potentially a weaker currency value moving forwards. Since it fits within the majority of our statistical distribution, it means the performance of GM is pretty normal and we’ve scored it as so with a score of -2 a slight short bias.
Over the past 10 years we’ve seen a significant rise and drop in the interest rate differentials between the US and Mexico. Between 2010 and 2015 we saw interest rates constantly rising and the exchange rate followed suit hitting major highs. But between 2017 and 2018 we saw the interest differentials slump and become narrower. Very recent data has shown the interest differentials increase by 0.45% which could give us an indication of future money flows and a potential increase in exchange rate moving forwards which is why we scored it at +3 for our relative analysis in our fundamental trading system.
If we follow the simple laws of supply and demand if the interest rates in Mexico are 7% and interest rates in US are 1.5% where are you going to make the most money? Obviously, the interest rates of 7% is a more appealing yield as an investor. This then increases the money supply of MXN and decrease the supply of dollars resulting in a strengthening dollar.
The final point in our analysis is assessing relative wealth between the US and Mexico. So, we’re using the S&P500 as a gauge. Overall, there’s a fairly positive relationship between the two asset classes. Which means as the performance of the S&P500 increases the USDMXN exchange rate increases. Recent data has shown that the S&P500 has broken new highs a 9.93% increase since it’s previous high suggesting a big move for the USDMXN exchange rate could be seen in the future. This has been given a very strong long score of +8 in our global macro trading system.
Our overall scores moving forwards for USDMXN are +40 for USD and -44 for MXN. This is a fairly strong indication of a long idea on a global macro fundamental analysis basis. But we don’t just want to jump into trade ideas, even if they’re good. Because, the last thing we want is to jump in get stopped out and the idea works, so we need to time our idea correctly.
How do we do this? Let’s take a look at the COT, technical analysis and the volatility of the pair.
Taking a look at the COT report for the USD we can see that overall Hedge funds are net long open interest. Meaning the market is with us on our idea to long the US dollar. However, we have seen them recently decreasing their interest. If that starts to dip below 0 on the line chart, we don’t want to be longing the pair and most likely we want to wait for hedge funds to align with our idea.
Regarding the Mexican peso (MXN) the same holds true. Hedge funds are net long meaning overall it’s a fairly neutral market going forwards. USDMXN have hedge funds longing both the dollar and the peso. Ideally, we want the Mexican peso to be net short for hedge funds (pink line below 0) this would give us great confidence that there may be a long term trend going forwards.
Overall, market sentiment is neutral with hedge funds long on both currencies. Ideally we want hedge funds to be net short here to be confident in this idea.
What does the technical analysis say? Since 2019 we’ve seen the exchange rate drop significantly. However, now the price is heading into areas of demand which have seen buyers in the past push the price to new highs. What we can expect here is to wait for a confident signal to go long as currently there’s no signs.
What do we want to see?
You can add your own types of technical analysis here of what you may think is a good indicator to go long. But the most likely area of reversal moving forwards is likely between the price range of 17.5 and 18.
If we were to enter long today. Assessing the volatility of the past 12 months we have a 1-month ATR of 4% approximately. This means if we go long our stop at the current price would be around 17.9933 and a soft target of 21.026. At the soft target, we have a few options either to wait for a pull back and scale in, let the trade run and move our stop to a positive risk-free trade.
If you want to learn the exact global macro approach so you can do it yourself and find your own trade ideas,