Daily Kickstart (Dear Mexico, We’re Sorry About All This)

I think I can probably sum up Wednesday with one sentence and one chart.

Sentence:

Donald Trump is holding his first post-election press conference today at 11 a.m.

Chart:

mexicans

So yeah, that’s it. That’s all you need to know. But I’ll regale you with the full summary for the purposes of decorum.

So clearly, the peso is having a rough go of it and the market is even more nervous than usual on Wednesday ahead of what’s sure to be a rambling, off the cuff affair at Trump Tower shortly before noon.

In a rather self-evident assessment, traders are blaming “weak market sentiment, low liquidity and lack of demand” for the peso’s slide, Bloomberg says. On Tuesday, Wells Fargo was out with a lengthy treatment, asking if the currency was experiencing its “Brexit moment.” Here are a few notable excerpts:

Is This the Mexican Peso’s “Brexit” Moment? The Mexican peso was one of the worst performing emerging currencies in 2016, with a 17% decline against the dollar, and has remained on the defensive thus far in 2017. Partly in response to ongoing declines in the peso, Mexico’s central bank has accelerated the pace of rate hikes and recently intervened in the foreign exchange market for the first time in nearly a year to lean against peso weakness and limit volatility. We see potential for further peso declines in the near term but expect the central bank’s currency supportive measures to contribute to stabilization and eventually to a mild peso recovery against the greenback. Accordingly, we target a USD/MXN exchange rate of MXN22.40 and MXN22.20 in six and 12 months’ time, respectively. That said, there are risks around this forecast, particularly given uncertainty around what, if any, measures the incoming U.S. Administration will take regarding the U.S.-Mexico economic relationship. Uncertainty around Mexico’s economic prospects in many ways mirrors the uncertainty the U.K. economy has faced since the U.K. vote to leave the European Union. In both cases, market participants have contemplated the potential for and likely effect of significant structural changes to the international trade and investment relationships of these economies. To be sure, the situations facing these two economies are far from identical, with important differences in the respective central bank responses to these shocks and the structure of the U.K. and Mexican economies. However, we believe price action in GBP/USD since the EU referendum is instructive in assessing downside risks to our peso forecasts if Trump’s administration takes some of the more stringent measures toward Mexico that the president-elect has previously discussed.

Right. There was no word on the correlation between the peso’s decline and the number of times Donald Trump mentions “Mexico” on Twitter.

mexico

Meanwhile, the beleaguered Turkish lira continued to struggle (more here) on Wednesday falling as low as  3.8951 in early trading as the market weighs whether the central bank can intervene or, ideally, hike rates without risking getting thrown in prison or shot (Erdogan isn’t a fan of unpatriotic rate hikes).

lira

“The measures announced by the central bank yesterday created the impression that instead of a rate hike it would rather gently raise forex liquidity and the cost of funding,” a banker told Reuters. “The market expectation is that the policy rate be raised at least 150 basis points within three months. If a step is not taken on this, the pressure on the lira will continue.” The source declined to give his name – for obvious reasons…

erdogan

“Markets will monitor whether CBRT will take additional measures to contain the depreciation pressure today,” a strategist at TEB in Istanbul (who will likely soon find himself detained) said in a note e-mailed to Bloomberg. “FX sales and tightening lira liquidity  will unlikely be enough to contain the depreciation pressure if CBRT refrains from hiking rates in the MPC meeting on 24 January,” he added. 

As for the struggling pound, cable hit a new YTD low as upbeat industrial and manufacturing production data failed to arrest the slide. Sterling hit its lowest level against the dollar since late October.

pound

You can see why one strategist recently told WSJ that “equity volatility is too low relative to where FX volatility is.”

Speaking of equities, Asian markets were mostly higher overnight. European shares rebounded from a weak start to trade higher. Oil is up on hopes that OPEC supply cuts will materialize and proceed as planned. That despite rising inventories in the US. “Few envision that Brent crude at sub-$50 is a viable price in the first half of 2017 amid OPEC production cuts tightening up the market,” an Oslo-based analyst said.

Complete market wrap:

  • S&P 500 futures up 0.1% to 2265
  • Stoxx Europe 600 up 0.2% to 364.74
  • MSCI Asia Pacific up 0.3% to 139.57
  • US 10Yr yield up 1 bps to 2.39%
  • Dollar index up 0.3% to 102.29
  • WTI oil futures up 0.9% to $51.26/bbl
  • Gold spot up 0.1% to $1188.85/oz
  • Stoxx 600 up 0.2% to 365
  • FTSE 100 up 0.2% to 7289
  • DAX up 0.2% to 11609
  • German 10Yr yield up 8bps to 0.36%
  • Italian 10Yr yield up less than 1bp to 1.92%
  • Spanish 10Yr yield down 2bps to 1.46%
  • S&P GSCI Index up 0.6% to 391.2
  • MSCI Asia Pacific up 0.2% to 140
  • Nikkei 225 up 0.3% to 19365
  • Hang Seng up 0.8% to 22935
  • Shanghai Composite down 0.8% to 3137
  • S&P/ASX 200 up 0.2% to 5771

Oh, and if you hear anything negative about Donald Trump, just remember this…

Happy trading.

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