EC March 2021 Monthly

Spot:  $0.7705 ($0.7645)       

Median Bloomberg One-Month Forecast $0.7705 ($0.7640)     

One-month forward  $0.7610 ($0.7650) One-month implied vol 12.0%  (10.3%)   

Mexican Peso

In the second half of last year, the Mexican peso appreciated by 15.5%, making it the second strongest emerging market currency after the South African rand. The peso had fallen by about 17.7% in H1 20. Even before the pandemic, Mexico's economy was contracting. The AMLO government eschews deficit-financed growth, putting more weight on monetary policy. Banxico meets on March 25, and the deputy governor suggested that there may be scope for two more rate cuts, which the market took as a signal. However, investors have turned cold toward the peso. Rising interest rates, especially in the US, knock an important leg from underneath it. The other two legs that the peso stood on were its trade surplus and strong worker remittances, and the best news of both are probably past. The high rates, record trade surplus, and strong worker remittances overshadowed the government's less-than-friendly business policies. Mexico has been hard hit by the virus, slow to roll out the vaccine, reluctant to used fiscal policy to support incomes and demand. The dollar finished February a little below MXN20.95, its highest close three months. The risk in the coming weeks may extend toward MXN21.50.  

Spot: MXN20.8550 (MXN20.5750)  

Median Bloomberg One-Month Forecast  MXN20.6350 (MXN20.5050)  

One-month forward  MXN20.9335 (MXN20.5854) One-month implied vol 17.1% (15.3%)

Chinese Yuan

The yuan's 1.5% gain in January was halved by the 0.75% loss in February. This change does not tell you that the dollar has been in a clear trading range against the yuan this year. The dollar traded between CNY6.4235 and CNY6.5150 in January and CNY6.43 and CNY46.49 in February. It is a closely managed currency. We suspect the PBOC is willing to see some yuan weakness in the dollar stages a broad recovery in March as looks likely. One of the popular investment themes had been the attractiveness of Chines bonds for the yield pick-up. Yet, since the middle of November, China's premium has fallen from over 250 bp to around 175 in late February.  China's National People's Congress is scheduled for March 4-5. It is one of the most important events in Chinese politics. The 14th Five-Year plan will be approved, and other policy objectives will be announced. It is about signaling and intentions.  Even with the dramatic decline in US and European shares in late February, China's CSI 300 Index underperformed with a small outright decrease compared to a 2.6% gain in the S&P 500 and a 2.3% increase in the Dow Jones Stoxx 600.  

Spot: CNY6.4735 (CNY6.4285)

Median Bloomberg One-month Forecast  CNY6.46800 (CNY6.4750) 

One-month forward CNY6.4955  (CNY6.4750) One-month implied vol  5.2% (5.1%)

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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