The commonality of Latin and South American currency pairs and price movements is the overnight rate remains fixed for long periods of time. Mexico for example lowered its Tasa de Fondeo to 3.00% from 3.500% June 2014. Chile lowered its Banco Central overnight rate from 3.250% to current 3.00% in October 2014 while Bacen in Brazil raised its rates July 30 2015 from 13.750% to current 14.250%. Columbia raised its Policy Rate August 2014 from 4.25% to current 4.50%. Peru lowered its rates to 3.25% from 3.50% January 2015.
The 3 Latin American pairs that move well and earn revenue and profits is Mexico, Brazil and Chile. Why Chile is due to its world source of copper that accounts for 47% of exports and Mexico and Brazil due to oil although oil accounts for 13% of Mexican exports to its largest trading partner, United States. Not only has Mexican oil peaked at 3.3 million barrels of exports per day in 2004 but current Mexican oil producer Pemex appears to be struggling to meet current 2.4 million barrels a day goals. Of the 83% Manufactured products and 26% autos slated for exports, 80% is shipped to the United States.
While the Mexican overnight rate is currently 3.00%, the Effective rate trades at 3.14% and up from 3.07% last Friday. Mexico trades 3 TIIE interest rates, termed Equivalent Interbank Interest Rates. Those rates trade 28, 91 and 182 day rates. Why non uniformity in days is due to Mexico’s 12:00 noon EST Fixes for exchange and interest rates. The Fixes are set ahead so allows MXN to be viewed as a forward exchange rate.
Cetes interest rates are special Repo Rates and known as funding rates with overnight and 1 week durations. The overnight rate is most important because it is here that allows banks to adjust CD’s, companies to lock in outright forward rates and issuance by banks of bankers Acceptance certificates for export purposes.
Bondes D are Mexican Federal Government Development bonds with maturities from 28 days to 1,3 and 5 years. Bondholders are paid the overnight effective rate compounded daily. Next are Bonos that pay a fixed interest, a price known before actual auctions. Maturities range in years 3, 5, 10, 20 and 30.
/USD/MXN currently trades below both XAG/XAU and XAU/XAG, EUR/MXN however is tracking XAU/XAG perfectly over the past 3 months.
The full USD/MXN trade may be lost due to inability to get this trade out sooner. From 16.1129, USD/MXn rose 585 pips to current 16.1715. No range breaks are seen above until 16.5962 and 16.6768 then below 16.1531 and 16.0726. The ranges are wide so MXN will trade in wide intervals. The overbought sell point is located at 16.1958 to target 16.1692, 16.1563, 16.1216. Maybe we can catch the downside.
Brian Twomey, Inside the Currency Market, btwomey.com