Friday, January 6, 2017

FX: "Dollar Consolidates Losses, Peso Firms while Yuan Reverses"

From Marc to Market:
The US dollar is consolidating yesterday's losses against the major currencies, giving it an apparently firmer tone today ahead of the monthly employment report.   Even though the Turkish lira continues to be sold to new record lows, the focus in the emerging markets in recent days has been the Mexican peso and Chinese yuan.  

Mexico's central bank is believed to have intervened in the Asian session for the first time.  This is helping the peso stabilize now.  Still, its 0.4% gain against the dollar (~MXN21.33), only manages to pare this week's loss to 2.9%.  The major trigger this week has been tweeted by the US President-elect objecting to investment in Mexico by the auto industry.    Since NAFTA and the loss Canada's preferential treatment, as well as Mexico's trade agreement with the EU, auto production is organized on a continental basis and Mexico now accounts for roughly 40% of the auto jobs in North America.  

Last February, when Mexico last intervened, the central bank also raised interest rates 50 bp between meetings.  Energy tax increases went into effect at the start of the year.  This coupled with the drop in the peso will likely boost price pressures.  The risk of a rate hike before the February 9 meeting rises if the intervention.  

Next week Mexico reports December CPI.  The year-over-year rate is expected to rise to 3.4% (from 3.3%).  It would be the highest since late-2014.  However, raising rates to defend a currency is a limited strategy especially when the domestic economy is already struggling.  Next week, Mexico also reports December industrial production.  It was off.14% in year-over-year in November.    Another course open to it is to change the intervention tactics and take a page from Brazil's playbook and use swaps, which do not have a direct claim on reserves.  

China does not have the same limitation in this regard as Mexico.  It is not that its reserves are a multiple of Mexico's.  Instead, it is that Chinese can squeeze offshore yuan deposit rates sharply higher, to instill in speculators that the yuan is not a one-way market while having little impact on the onshore interest rates.  In any event, after the biggest two-day rally on record, the offshore yuan (CNH) fell 0.7% today, and the onshore yuan (CNY) slipped 0.6%.   On the week, CNH is up 2%, while CNY is up a little less than 0.4%.   Yesterday's gap created by the sharply lower dollar opening has been filled.  

Chinese shares are eased to pare this week's gains; the Shanghai Composite gained almost 1.9%.  Most Asian equity markets, save China, Japan and India posted small gains, but the MSCI Asia Pacific Index lost 0.2% after a two-day 3% rally.   European shares are also seeing this week's gains pared.   The Dow Jones Stoxx 600 is off 0.25% near midday in London.  Some markets are closed or thinly traded due to the holiday.  Most sectors are seeing profit-taking, though the real estate sector is bucking the trend....