ahead of the G20 meeting in Shanghai USDCNY FIX was marginally higher at 6.5481. What we are seeing is the CNY staying within normal trading ranges without any more sudden devaluation. This managed exchange rate strategy should persist near-term despite FX outflows having not slowed meaningfully (Jan FX outflow approx. $90bn). In support of our view of ordinary two-way trading, Chinese policy makers indicated that were was no effort to resort to competitive devaluation to support the economy. PBOC’s Governor Zhou stated that the central bank “will not resort to competitive depreciation to boost our advantage in exports”. In addition, Governor Zhou indicated his bias towards policy easing and highlighted the fact that there was scope for further action if necessary. We believe this to be correct and anchor our expectations that the Chinese economy will not decelerate significantly further nor will a credit crisis threaten stability. Today’s, solid results in Asian equity markets are the results of lower volatility emulating from China. Elsewhere, BoJ Koruda continues to talk his book and indirectly defend this decision to turn to negative rates. He also indicated that any potential effect of below zero rates would be carefully monitored.
Central banks are struggling to satisfy their underlying mandates. With global growth decelerating, deflationary pressure is rising and steady bouts of volatility rolling though markets investors might be tempted to turn to the G20 meeting this weekend. Ahead of the G20 meeting in Shanghai there is increasing speculation about an international coordinated policy response. The normal channels have become stuck yet conditions for a coordinated exchange rate response have not worked in the past. Even less likely than a coordinated FX response, would be an expansion of fiscal policy options. A grand solution like the Plaza Accord feels far-fetched. Nations, which comprise the G20, are too unique to ever find consensus in terms of agreeing to which currencies are mispriced and decided who wins and who loses would be far too complex. Most likely the markets will prepare a strongly worded communiqué calling for nations to work together, limit excess FX volatility and abstain from competitive devaluation. While expectations are low a strongly word message from the G20 will help the current positive risk sentiment continue.
Crude prices rebounded as news spread that OPEC and non-OPEC energy ministers would meet next month. WTI front month rose 2.9% to $33.10 brl. There are rumours that the primary discussion will revolve around further production freezing. Commodity prices have been recovering but from a very weak level as risk sentiment has improved and fear of global demand falling off the map dissipated. On the fringes there are developments which can be seen as a positive for commodities. The most prominent has been oil’s forward curve moving into contango with the help of OPEC’s (select members) decision to halt production increases. While in China, recent data indicates a renewed demand for iron ore and copper.
Too high expectations on the Mexican unemployment rate
After yesterday’s current account balance that improved to $-7.7 billion from $-8.8 billion. Markets are now closely watching the unemployment data which will be released today. For the time being, it has dropped in February to a six-year low at 4.37%. We firmly believe that the unemployment rate may fall further.
Indeed, despite Mexican’s GDP is on the rise on the fourth quarter of 2015. Last December retail sales data printed negative at -1.6% m/m and industrial production has been also released at -0.1% m/m. Mexico is clearly suffering from the fact its central bank needs to carefully follow Fed’s monetary policy in order to avoid any capital outflow that may result from a narrowing rate differential. Mexico is way too dependent on the U.S. economy health.
Last but not least, Mexico is also paying the price of the lack of investments in its industry sector and in particular in its oil industry which infrastructure are very ancient and does not enable Mexico to be competitive. Mexico’s economy is set to decline. We remain bullish on the USDMXN and we target 19.00.