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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Confident consumers push MXN higher
Michael O’Neill
FX Trader, Loonieviews.net
Summary: The Mexican peso gained some ground versus King Dollar today on the back of a strong February consumer confidence print, but the key factor remains central bank policy and the next crucial print is February inflation on Thursday.
Mexican consumers are feeling confident. The National Institute for Statistics and Geography said this morning’s Consumer Confidence index was 116.8 compared to 111.9 in January. USDMXN dropped on the news.
On March 2, Standard and Poor’s trimmed Mexico’s credit rating outlook from stable to negative while leaving the BBB sovereign rating intact; this was expected. S&P blamed increased government spending on Pemex (the national oil company), which could impair the government finances, for the rating adjustment. That shouldn't have been a surprise as last week the Bank of Mexico (Banxico) warned that Pemex’s $100 billion debt could put pressure on its ratings, and it looks like they were right. Banxico also cut the 2019 GDP growth forecast from 2.2% to 1.6%, the third consecutive quarterly cut.
Mexico February inflation data is due on Thursday and expected at 4.48%. The central bank is targeting 4.1% inflation for Q1. Some analysts believe that the mix of lower growth and softer inflation would let Banxico reverse December’s 0.25 basis point interest rate increase, bringing its benchmark rate back to 8.0%.
USDMXN peaked at 20.6350 in December and plunged to 18.8800, coinciding with a steep plunge in oil prices. Since then, the currency pair has been in an 18.8800-19.4660 trading range with a bullish bias as the uptrend line from April 2018 is intact while prices are above 19.000.
FX markets were roused from a deep slumber when US ISM non-manufacturing PMI and New Home Sales beat forecasts. NZDUSD was the biggest loser since the open, followed closely by GBPUSD. EURUSD dropped from 1.1330 to 1.1307 with technical traders looking for a break of 1.1280 to fuel losses to 1.1190.
Wall Street largely ignored the US economic data. The three majors are very close to unchanged as of 14:05 GMT, with traders waiting for US/China trade talk updates and Thursday’s Federal Open Market Committee meeting.
On March 2, Standard and Poor’s trimmed Mexico’s credit rating outlook from stable to negative while leaving the BBB sovereign rating intact; this was expected. S&P blamed increased government spending on Pemex (the national oil company), which could impair the government finances, for the rating adjustment. That shouldn't have been a surprise as last week the Bank of Mexico (Banxico) warned that Pemex’s $100 billion debt could put pressure on its ratings, and it looks like they were right. Banxico also cut the 2019 GDP growth forecast from 2.2% to 1.6%, the third consecutive quarterly cut.
Mexico February inflation data is due on Thursday and expected at 4.48%. The central bank is targeting 4.1% inflation for Q1. Some analysts believe that the mix of lower growth and softer inflation would let Banxico reverse December’s 0.25 basis point interest rate increase, bringing its benchmark rate back to 8.0%.
USDMXN peaked at 20.6350 in December and plunged to 18.8800, coinciding with a steep plunge in oil prices. Since then, the currency pair has been in an 18.8800-19.4660 trading range with a bullish bias as the uptrend line from April 2018 is intact while prices are above 19.000.
FX markets were roused from a deep slumber when US ISM non-manufacturing PMI and New Home Sales beat forecasts. NZDUSD was the biggest loser since the open, followed closely by GBPUSD. EURUSD dropped from 1.1330 to 1.1307 with technical traders looking for a break of 1.1280 to fuel losses to 1.1190.
Wall Street largely ignored the US economic data. The three majors are very close to unchanged as of 14:05 GMT, with traders waiting for US/China trade talk updates and Thursday’s Federal Open Market Committee meeting.
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