Tags: sean | hyman | peso | oil | mexico

Peso Is Only Two Steps Away from Sliding Off Cliff

By    |   Monday, 17 May 2010 11:00 AM

Oil has had an amazing run this past year, from under $58 a barrel to just more than $86 a barrel. However, now it looks like the party is over for rising oil prices.

On Friday, oil trading closed at $71.64 a barrel. At that level, it’s broken its uptrend by many different metrics. It’s broken its major moving averages (50 day simple moving average, or SMA, and 200 day SMA). It’s had lower highs and lower low recently, too. So any way you slice it, it’s very likely that it’s heading into a downtrend now unless something miraculous happens for it.

With all of the trouble spreading in Europe, there’s a great chance that the economies in the euro zone slow down quite a bit, especially with all of the strikes going on that hurts productivity so much.

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All of this could end up eating into their GDP growth and slowing down their economic output.

Well, if your economy slows down, then you’re not consuming as much energy as when you are firing on all (or most all) of your cylinders. So that’s one thing that’s hurting crude right now.

Another thing that is hurting crude is that crude is starting to be stored up again all over the place. That increases the supply and since the demand is slowing down from Europe, which means oil prices will trim back. That’s exactly what we’ve seen. Except I think there’s still much more of that to come.

Now, since I’m not an oil trader but rather a currency trader, I watch the price of crude to see how it may affect many of the oil exporting nations and thus their currency as well.

Mexico’s largest export is crude oil. Therefore, as crude oil prices shrink back, so do the profits of these Mexican oil exporters. If that happens, it’s one thing that will weigh upon its currency, the peso. 

So that’s my first trigger. If oil plunges solidly below $70, it’s one thing that will make me bearish on the peso. However, I want to see a second trigger happen before I’ll really get bearish on the peso.

What is that other trigger? It’s the Mexican stock market. The Mexbol Index had an impressive run this past year. It ran from around 18,000 on that index up to around 33,000 or so. However, recently it’s pulled back to 31,812 as of Friday’s close.

Now if this index cracks 30,000 and closes below it, which will be my other trigger that has gone off and will make me doubly bearish on the peso.

So if oil cracks $70 and holds below it, I know that the exporter’s profits are shrinking rapidly and that’s hurting the profits of these major companies within their nation.

If their stock market falls below the 30,000 level, it will breach a very psychological level but more importantly it will have begun to have lower highs and lower lows (which is the definition of a downtrend).

That will cause investor sentiment to turn negative on Mexico and investors will start pulling their money out of Mexican stocks. This outflow of money out of their stocks will be repatriated back to the investor’s home currency or to a more favorable country that has a better economic outlook. In either case, that’s bad news for the peso.

So, as oil tanks and Mexican stocks tank, the peso will be punished and the dollar will gain strength as money runs to it as more stocks and commodities pull back during the coming months.

This will be great news for the U.S. dollar/peso pair since it will benefit from both the inflows out of Mexico and the inflows into the U.S. dollar.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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Oil has had an amazing run this past year, from under $58 a barrel to just more than $86 a barrel. However, now it looks like the party is over for rising oil prices. On Friday, oil trading closed at $71.64 a barrel. At that level, it s broken its uptrend by many...
Monday, 17 May 2010 11:00 AM
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