EC Looking Forward: May Monthly

The trajectory of the policy mix is support for the Canadian dollar, which strengthened for the third consecutive month in April. Much good news has been discounted, including three rate hikes by the end of 2023, but the policy mix often leads to currency overshoots, and the OECD's model of Purchasing Power Parity has the Canadian dollar undervalued by 2.5%. 

  • Spot: CAD1.2290 (CAD 1.2565).
  • Median Bloomberg One-month Forecast: CAD1.2400 (CAD1.2575).
  • One-month forward: CAD1.2300 (CAD1.2560). One-month implied vol: 6.2% (6.6%).

Australian Dollar

The Australian dollar rallied strongly on the reflation meme that began in earnest in early last November and peaked in late February, a little above $0.8000. It has spent the last two months confined mostly to a $0.7600-$0.7800 trading range. The range was frayed on an intraday basis, but did not close outside of it a single time in April. The risk, in at least the first part of May, seems to be on the downside, which may extend toward $0.7500.

The central bank could taper its quantitative easing and yield curve control in Q3. A rate hike looks largely discounted for Q3 22. A full third of Australia's exports are shipped to China, yet the strategic interests diverge. Canberra recently canceled two projects in Victoria under the auspices of China's Belt Road Initiative. This will further antagonize the strained relationship.  

  • Spot: $0.7715 ($0.7600).
  • Median Bloomberg One-Month Forecast: $0.7705 ($0.7635).
  • One-month forward: $0.7720 ($0.7605). One-month implied vol: 8.6 (9.7%).

Mexican Peso

After falling at the start of the year, the peso trended higher since early March, but the recovery ended abruptly in late April. Two of the three legs on which the peso stood weakened. The large trade surplus swung into deficit in March, and its interest rate appeal seemed to slacken as other emerging market countries began a tightening cycle (e.g., Brazil, Russia). 

Rising price pressures and an economy proving resilient (Q1 GDP 0.4% quarter-over-quarter and was forecast to have stagnated) will prevent Banxico from resuming its easing cycle, and that also changes the outlook for Mexican bonds for fund managers. In contrast, Brazil's central bank meets on May 5 and it is likely to deliver its second consecutive 75 bps rate hike, which would lift the Selic rate to 3.50%. A move above the MXN20.50 could signal a test on MXN21.00.

  • Spot: MXN20.2460 (MXN20.4415).
  • Median Bloomberg One-Month Forecast: MXN20.3820 (MXN20.4350).
  • One-month forward: MXN20.3150 (MXN20.5115). One-month implied vol: 12.5% (14.8%).

Chinese Yuan

The yuan will take a four-week advance in tow, but it will likely be broken at the start of the new month, and if we are right about that, the dollar will take on a better tone. The yuan's 1.2% gain in April represents a middling performance in the region and among emerging market currencies more broadly, though it matched the gain of the JP Morgan Emerging Market Currency Index.

Chinese officials are withdrawing fiscal support by discouraging increases in lending (banks) and borrowing (local governments), but they do not appear to be considering a rate hike. Chinese regulators have toughened their stance toward the large new economy companies, which are not in the private sector.

This may have a cooling-off effect. Three months into the Biden administration and there does not appear to be any improvement in the bilateral relationship. At the same time, China's aerial harassment of Taiwan is unabated, keeping the geopolitical tension elevated.

  • Spot: CNY6.4750 (CNY6.5530).
  • Median Bloomberg One-month Forecast: CNY6.4885 (CNY6.5140).
  • One-month forward: CNY6.4900 (CNY6.5760). One-month implied vol: 4.7% (5.0%).
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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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