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The dollar is mostly softer, but turnover is mostly quiet. The Swedish krona leads the move after higher-than-expected underlying inflation. It is a mild risk-on day with equities moving higher too. In the Asia Pacific region, China stood with the CSI 300 up almost 2.5%. Europe’s Stoxx 600 is up fractionally to recoup most of the pre-weekend decline. US equity futures are narrowly mixed. European bond yields are little changed, with a couple of exceptions: Sweden is 6-7 bp higher on the back of the inflation, and UK yields are a few basis point softer even though the UK is expected to report its large January budget deficit in a quarter of a century tomorrow.   

China indicated it will propose a peace plan for Russia-Ukraine on February 24, the anniversary of Russia’s invasion. It says its territorial integrity must be preserved and the UN Charter, but Russia’s security needs must be recognized. It is not exactly clear what it means, and it comes as the US says Beijing is considering providing Russia lethal aid, which sounds partly like a diplomatic creation as China, India, and Turkey buy Russian oil giving it money to purchase lethal aid from Iran, for example. Is it hard to picture a quid-pro-quo, like the missiles in Turkey that were removed (quietly) after the Cuban Missile Crisis? Imagine China saying we will not provide lethal aid to Russia if the US stops providing lethal aid to Taiwan. Meanwhile, Europe is discussing a joint effort to buy ammunition.  

As expected, China left its loan prime rates steady but separately, reporting the first year-over-year increase in foreign direct investment since last June.  

There is some optimism that a deal on the Northern Ireland protocol is at hand. Prime Minister Sunak is expected to update parliament as early as tomorrow. It seems like a key issue, that the EU does not seem prepared to budge on is the role of the European Court of Justice.  In his rush to get a deal done, former PM Johnson has committed to scrapping the ECJ’s role. The Democratic Unionist Party in Northern Ireland is not keen on Sunak’s proposals, which recognize the role of the ECJ. The DUP refuses to take part in the Northern Ireland power-sharing arrangement created by the Good Friday Agreement, which is 25 years old this April. Since the ECJ’s actual role is minimal this issue may really be symbolic.   

The Mexican peso has been on fire. It is the strongest currency here at the start of 2023.  Wide interest rate differentials speak to the carry, while Bolsa also appears to be drawing funds. Foreign direct investment is also demand for the peso. The overnight target rate is at 11.00% and the Deputy Governor Heath of the central bank said the terminal rate may be 11.25%-11.75%.  The swaps market puts it at the upper end of that range. The dollar settled last week (~MXN18.3720) at a low since 2018 and below the lower Bollinger Band (~MXN18.3855). I have been suggesting a medium-term target near MXN18.0.  As one would imagine with the sixth loss in seven sessions, the dollar is stretched. In corporate news, Femsa (among other things, the largest Coca-Cola bottler in Mexico) is paring its Heineken stake (ostensibly favorable for the peso) but may consider the purchase of a US convenience store chain (peso negative). It is consolidating today, with the greenback a little firmer around MXN18.43. Initial resistance may be in the MXN18.45-MXN18.50 area.  

Indicative ranges through the European morning: Euro $1.0673-$1.0705, JPY133.95-JPY134.55,  Sterling $1.2015-$1.2057, CAD1.3450-CAD1.3495, Australian dollar $0.6857-$0.6919.  

Tuesday features the preliminary February PMI, minutes from the recent Reserve Bank of Australia meeting, and the German ZEW survey. In addition to the flash PMI, the US also seeing existing home sales. Canada reports retail sales and CPI. 

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