Currency speculators have not been this bullish on the Mexican peso in about four years. The Canadian dollar (FXC) has enjoyed such bullishness for a year longer.

In 2017, the Mexican peso broke its longest post-recession spell of bearishness. How long will traders keep up this mood swing?

In 2017, currency traders swung sharply from a bout of maximum bearishness on the Canadian dollar to a bullishness unseen in years.
Source for charts: Oanda’s CFTC’s Commitments of Traders

I have traded alongside these bulls for several months now, but I decided this week to pull in the reins because of looming geo-political uncertainties.

At a rally in Phoenix, AZ, President Donald Trump predicted that the U.S. might have to dump NAFTA, the North America Free Trade Agreement. No word yet confirming Trump’s seriousness on the matter, and the peso and loonie held relatively steady through the headlines. Still, the remarks reminded me that these NAFTA negotiations present a real risk in trading both currencies. Since news flow will likely be very spotty and sporadic during the negotiations, I assume very short and/or small trades should still be OK. However, I see too much risk in extended strategies like accumulating a short in USD/MXN by fading rallies. My last such trade stretched out for its longest duration yet: almost a full month. I can take a hint.

The Mexican peso has taken advantage of U.S. dollar weakness with an extended downtrend all year. However, USD/MXN has gone over a month without a new low which means the downward pressure has eased for now.

Like USD/MXN, USD/CAD has yet to make a new low in a month. This is the longest such stretch in the almost four months USD/CAD has trended downward. Unlike the Mexican peso, the Canadian dollar spent little time retesting resistance at the downtrending 50-day moving average (DMA) against the U.S. dollar. If it were not for the NAFTA uncertainty, I would readily bet on a fresh breakdown for USD/CAD.