FX Daily: Scaling back the prospects of more easing by Mexico’s central bank
After the volatility seen last month, market expectations of a rate cut by Mexico's central bank have been scaled back. We think an unchanged policy may be the safer bet now that inflation expectations have been pushed to the highest level seen since summer 2018. Expect a stronger MXN later this year
USD: A big test of the DXY 200-day moving average resistance
DXY is testing the key 200-day moving average resistance level at 92.63, with the dollar up against all G10 FX overnight despite stabilising Asia equity markets and equity futures pointing to a modestly higher European open. With Europe battling a third wave of the pandemic, near-term risks are skewed to a higher dollar and further rises in DXY.
It is a very quiet day on the US data front, with the final estimate of Q4 GDP likely to have a fairly limited impact on the dollar.
EUR: As the EUR struggles, all eyes on the Swiss central bank
EUR/USD continues struggling, with 1.1750-1.1800 being the next key test area for the cross.
The Swiss central bank holds its quarterly monetary policy meeting today. Swiss 2020 GDP contracted by -3% rate, which was expected by the SNB at its last meeting in December, suggesting it may not err much from its 2.5-3.0% forecast for 2021.
Let’s see whether the central bank still describes the CHF as ‘highly valued’. Probably, since the CHF nominal trade-weighted index has not corrected much lower at all.
Overall, we suspect EUR/CHF can hold 1.10 support on today’s event risk.
GBP: Despite recent woes, GBP short-term fair value has improved vs EUR
While GBP has struggled lately, we note that its short term financial fair value has improved vs EUR over the past two weeks, by more than 1%. Similar dynamics were observed in EUR/USD, where its short-term fair value has declined lately, clearly pointing to EUR issues (as its fair value deteriorated).
With EUR/GBP no longer being meaningfully undervalued (in fact now close to its fair value of 0.8640), this opens the door for further eventual declines in the cross towards our target of 0.8500. Short-term valuation is no longer a GBP headwind.
MXN: Further easing prospects scaled back
Mexico's central bank meets today and after the unanimous rate cut to 4.00% in early February, the market had toyed with the idea of a further 25 basis points rate cut today.
Those expectations have been scaled back after the volatility seen last month, with MXN 4% weaker, and 10-year MBONO yields +130bp as the market moves to price a 50-75bp tightening cycle later this year. As to what Banxico will do, an unchanged policy may be the safer bet now that inflation expectations (from the 5-yr inflation linkers) have pushed up to 4.17% - the highest since summer 2018.
At the same time, the central bank may want to push back on tightening expectations, having so openly discussed further easing in 2021. What does this all mean for the MXN? Well, a commodity-linked currency, exposed to strong US demand and set for strong remittances in 2021 (worth 3.8% of GDP in 2020) favours a stronger MXN later this year. USD/MXN rallies may stall at 21.10/20.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).