Softer Yields = Softer Dollar

The central bank of Mexico left the target rate at 4.00%, as widely anticipated. The Banxico statement indicated that even though inflation has accelerated faster than expected, it has not given up on the idea that it will still converge to the 3% target by the middle of next year. Like the Federal Reserve and the European Central Bank, Banxico views the higher inflation prints (headline CPI nearly 6.1% in April, with the core a little above 4.1% and the non-core prices rising almost 12.35%. After sketching out both upside and downside risks, the central bank concluded, "The balance of risks that might affect the anticipated path for inflation within the forecast horizon is biased to the upside." The market seems to think those upside risks will, in fact, materialize, and the swaps market about 50 bp in rate hikes in H2 21. Banixco's next meeting is on June 24.

The US dollar is trading inside yesterday's roughly CAD1.21-CAD1.22 range. There is an option for $365 mln at CAD1.2125, just below the low seen in Europe. A break of CAD1.21, which is also the (61.8%) retracement of the Wednesday-Thursday bounce, would likely signal a retest on the six-year low set this week near CAD1.2045. The greenback reversed lower against the Mexican peso yesterday after setting the week's high around MXN20.2135. It is extending the pullback today and looks poised to challenge the week's low (~MXN19.8275). The peso sold off the first three sessions this week but has bounced back and is now higher on the week (~0.25%). The peso has fallen only one week of the past seven.

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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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