While resurgent volatility suggests that risky assets are still in jeopardy, in general, high beta FX have not been materially affected.
The S&P 500 saw all sectors close down, part of the global stock collapse, US yields rallied and volatility surges - yet FX remained stable. This lack of contagion to us indicates that we are seeing a technical correction rather than a structural shift. Unlikely that rise on volatility will derail the broader positive outlook.
In the FX market, the Mexican peso is increase becoming attractive, as MXN has been the most responsive currency during periods of stress yet currently remarkably stable.
Last week Banxico raised policy interest rate 25bp while providing a hawkish tone signalling more hikes are likely. The Mexican central bank is increasingly unconvinced about inflation outlook. The interest rate hike in December, was followed by a February rate rise as expected. In its communication, Banixco highlighted risks to inflation and now expects the 3% target in 2019. It's unlikely given the domestic and global environment that inflation will come down meaningfully. GDP had contracted in Q3 due to natural disaster, 4Q recorded solid growth (probably in part catch-up effects).
We don't see any dovish policy communication until 2019 and could see rates peak at 5.75%. Risk of the NAFTA re-negotiations and the presidential elections due on 1 July have weighed on business and consumer sentiment. We continue to see a soft NAFTA result. The sixth round of negotiations took place in January where US, Canada and Mexico stated that progress had been made. Despite Trump's feet stomping, US - Mexico trade economy is deeply integrated. Any protectionist action would have complex result and most barriers can be easily circumvented.
Economics Mexico Peso Looks Interesting While peso faces volatile times wee would see current USDMXN strength as an opportunity to reload shorts.
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