Commentary: For MXN, All News is Bad News

The private ADP employment survey came a bit lower than economists expected today, with private firms adding 135,000 jobs versus the 157,000 consensus estimate.  The dollar was weaker on the news, but then quickly recovered its losses.  Talks abound of the Fed tapering off its bond purchases, this has no doubt been a major factor in the sudden exodus from emerging market currencies.  Mexico's Peso, a long favorite of many investors for the past year, has been particularly hard hit.  The spread between US and Mexican treasury securities continues to widen as investor's flee MXN denominated assets.  Mexico and its central bank are in a tough spot when it comes to forming policy in the coming quarters.  Inflation continues to creep up, but a manufacturing slump continues to hurt growth.  Good economic data from US should help Mexican fundamentals, but strong US economic performance has been largely taken as a signal that the Fed will end its asset purchase program sooner.  Conversely, a poor NFP report this Friday may make MXN pop as some investors initiate Fed stimulus bets, but weaker US hiring also should hurt external demand for Mexican products.  The result is a directionless market where USD/MXN continues to drift higher.  I still like Mexico long term, but I prefer to sit on the sidelines until we get clearer signals from the Fed and the Bank of Japan on the future direction of monetary policy.  

This Friday, I intend to buy USD/ZAR on any dip post jobs.  I will also have a buy order a full 200 pips above the market level immediately before the release.  The plan will be to capture the move higher if NFP surprises to the upside.  ZAR remains my preferred choice taking advantage the EM currency sell-off, mainly because South Africa's weak fundamentals are also weighing heavily on the Rand.  Finally a word of caution.  Central bank opacity continues to cause jitters up and down all financial markets.  As such, I am keeping at least 40 percent of my holdings in cash, for now.   

Trade Idea: Sell SGD/INR

EM currencies have been slammed as of late, making it very difficult to advocate buying any exotic against any major, especially USD.  However, the idea of selling EM currencies against each other in search for "relative value" and fat carry is more attractive than ever, given EMs are moving in lockstep.  On this front, I have initiated small short position in SGD/INR.  Singapore is hardly an emerging market, with GDP per capital over 60,000 US dollars.  However, its export driven economy is tied closely to Asia and its emerging markets.  Indeed, SGD has been whacked with all Asian currencies as of late.  Therefore, given rock bottom Singaporean interest rates and relative high rates in India,   an odd but usually stable carry trade opportunity has emerged.  For the foreseeable future, these two currencies should move together.  Thus, while underlying value of the pair will continue to trade in a tight range, the shorting it should produce a steady stream of relatively low risk carry in the  coming weeks and months. 

Weekend Update: Strong USD, Nikkei Remain in Focus

Last week was not very fun for me, booking losses  on short USD/MXN positions and buying USD/JPY on weakness only to fall victim to a larger pullback.  Last week was all about profit taking for Japanese investors.  The Nikkei sold off to the tune of 7.5 percent on Thursday. (After being up over 3 percent the same session).  Japanese investors were also net sellers of foreign securities; more profit taking given the that the weak JPY makes overseas holdings very dear in Yen terms.  

In general we have a market that seems desperate to get long the USD.  This is understandable, given that among advanced economies, the US has clearly emerged as the dog with the least amount of fleas.  Indeed, the mere hint of a slowing of the Fed's QE programs has spooked equity markets and resulted in broad USD strength.   To be sure, doves outnumber hawks on the FOMC, and Bernanke has stressed repeatedly that a decision to slow asset purchases would be based on strong economic data. However, the fact that Mr. Bernanke is ready to talk specifics on the Fed's exit strategy has sent markets into a USD buying frenzy.  Strong economic data will now be even more USD positive, especially against JPY, EUR, and GBP.  CAD and MXN, which have continued to rise on good US data even after the calming of the Eurozone crisis will be key indicators of the market's mood on the greenback. A fall of either of these relative to the USD on strong non-farm payrolls would indicate a market highly bullish on the USD.  

Given these realities, last week I cut down my short USD/MXN position, and bought USD/JPY so that I would be net long the dollar.  I also initiate a small long EUR/CHF position.  This pair has found strong support at 1.24, and SNB policy assures limited downside.  I still like MXN, especially since I believe the recent slowdown is probably a delayed reaction to the Q4 contraction in the US.  However, being short USD in the face of a such bullish sentiment is a dangerous game.  

    

Commentary: MXN in for Pain Short Term

The party couldn't last forever, and USD/MXN has now established a firm uptrend.  Several factors are at work to keep MXN under pressure in the near term.  First, the market's interpretation of the Chairman Bernanke's comments have been largely dollar positive.  While Bernanke did not give a time line for the implementation of the Fed's exit strategy, the mere fact the the Chairman and other FOMC members are ready to discuss the operational specifics for the unwinding of the Fed's balance sheet has spooked markets.  Furthermore, general risk off sentiment has boosted the usual suspects.  Indeed, both JPY and CHF are both up on safe haven demand.  

More disconcerting, the internal strong internal fundamentals which helped MXN in the face of global headwinds have weakened somewhat.  Growth slowed in the first quarter to 0.8 percent yoy.  While stubbornly high inflation probably precludes a rate cut for the next couple of meetings, the Banco de Mexico may cut further in the fall should growth fail to recovery.  While a resilient consumer has helped Mexico maintain robust service sector growth, a manufacturing slump driven by weak export demand continues to weigh heavily on overall sentiment.  

Given these developments, I have revised up my year end target for USD/MXN to 11.8. I have cut down my short position at a loss, though I look to resell at a higher level.  I will take positive economic data out of Mexico as a sign to re-enter, with a particular bias towards strong industrial production data.  Lacking that, without strong signalling by the Fed of further easing, I see the pair climbing back up towards 12.8 in the near term.  

   

Commentary: Fed in the Driver Seat as Markets Await Bernanke Testimony

Conflicting signals from top Fed officials continues to drive equity and FX markets this week, although now in the opposite direction.  The last week and half have been all about rumors of the Fed 'tapering off' its bond purchase program before the end of the year, stoked by comments by San Fransisco president Williams.  Williams, who earlier in the year had affirmed his support for continued asset purchases, suggested last week that he was open to a winding down of Fed's 85 billion dollar monthly bond purchase program as early as the end of the summer. Such talk had sent stocks lower and the greenback higher during Friday trading, capping a week long dollar rally that had resulted in fresh highs for USD/JPY. 


On the other side of the table, Chicago Fed president Charles Evans was keen to reassert teh dovish tone at the Fed in what may or may not have been an attempt to walk back the Williams' speech.  Evans acknowledged that the US economy is performing 'quite well,' relative to other advanced economies, Evans, arguably the most dovish FOMC member, stated that bond purchases were here to stay given subdue inflation and historically high unemployment. Evans comments have been met with fading of the dollar rally, indiscriminate of local fundamentals.  Despite a slowing economy and lower intra-day stock market, USD/MXN traded lower on the news, sliding to 12.27. 

Fed Chairman Ben Bernanke is also set to testify before Congress this week.  While his testimony is always a significant market event, this week's two day affair before House and Senate committees appears to be of particular significance, especially for the FX market.  Specifically, market participants will be looking for a clear direction from the central bank's chief as to the pace of any winding down of asset purchases.  Markets will be hoping for Bernanke to 'break the tie' between the conflicting statements put out by FOMC members recently.  Bernanke, whom  Evans called a "spectacular chairman," may calm markets by reaffirming the Fed's intention to continue its QE program well into 2014.  More likely, Bernanke is will stick the thresholds set by the Fed in late 2012 and stress the Fed's dual mandate of maximum employment in a context of price stability.  Asset bubbles, a major downside risk to cheap credit, are likely to be a theme, but 1.2 percent headline inflation and 7.5 percent unemployment leaves the door wide open for more stimulus.   

News: Good Data From Abroad Fails to Crimp Dollar's Style

The USD has continues to climb higher today, rising against everything from JPY to MXN.  The Euro opened down nearly 50 points, despite better than expected car registrations, suggesting that auto-sales on the Continent may finally be picking up.    USD/MXN also extended its recent rally, pushing as higher even as Mexico posted higher than expected growth for Q1 or 2013.  Analysts had been expecting 0.3 percent YoY growth, in light of slowing manufacturing sector.  While a slowdown did occur in the industrial sector, Mexico's service sector grew fairly robustly, or 1.9 percent on a YoY basis. The manufacturing sector shrunk however, by 1.5 percent YoY, consistent with March's dismal IP data.  The primary sector grew at a 2.8 percent YoY pace, mainly due to increased crop yields.   The manufacturing sector, the engine behind Mexico's booming exports, seems to have been hurt somewhat by US fiscal consolidation.  Belt tightening occurred south of the boarder too.  The Mexican government has been diligently working to eliminate its small budget deficit.  Mexico's deficit in Q1 2013 was fifty percent smaller than its was this time one year ago. On the bright side, the Mexican consumer seems to have filled the spending gap somewhat, as evidenced by steady PCE data. 

Data is great, but the broader theme here is a buoyant dollar that appears to be overwhelming internal fundamentals of both major and exotic currencies.  Indeed, GBP, CHF, AUD, ZAR, INR, THB, TRY and a host of others are all way down for the week.  Some of these country's central banks have taken action of late, and some haven't.  The feeling in the air though, is the the Fed may be preparing to wind up its QE program while around the world other central banks are just getting starting.  

  

 

News: USD Pushes Higher, Mex Q1 GDP Looms

The US dollar has reasserted itself once again on the back of last week's surge in USD/JPY.  USD now appears to be firmly anchored above JPY 102, after bouncing off this key support level earlier this morning.  Buy the dip seems to by the story with pair, as USD/JPY sales are met with fresh buyers.  

But its not just the Yen which is the dollar's latest victim. While much talk is afoot about the 'realignment' of AUD, the Aussie dollar's dip below parity has coincided with broad dollar gains against majors and exotics alike. EUR/USD has dipped below 1.29 and its now settling into a 1.28-50 range.  Sterling is on the back foot again, but appears to have found short-term support at 1.52.  USD/CHF is trading in concert with EUR/USD.  Many expect a retest of .99 or even parity.  

On the EM front, USD/ZAR is pushing higher, and appears poised to test the crucial 9.30 level which was the peak of the last rally.  Further labor unrest and low commodity prices is also weighing heavily of ZAR.  Asians are down with the Yen and AUD.  USD/INR is trading higher in the 54.50-80 range.  USD/THB, which plunged earlier this year, is back near 30.  Finally, KRW has been under heavy pressure on speculation that the BOK, which cut rates along with the RBA last week, may intervene on FX markets to protect Korean exports against a weaker Yen.     Finally, USD/MXN is pressuring 12.30, especially in light of the low expectations for Q1 GDP due out Friday. The finance ministry expects annualized GDP to come in at a paltry 1 percent.    

In short, the greenback is consolidating its gains against everything.  While I am tempted to pat myself on the pat for buying USD/ZAR last week, it appears that the real theme is strong USD dollar.  Virtually any long USD is well in the green for the week.  A win is a win, but broad dollar strength, not internal fundamentals of individual currencies, appears to be setting the tone the FX market.