This morning, the Trump Administration called the leaders of Canada and Mexico to tell them that he “agreed not to terminate NAFTA at this time,” showing, yet again, that Donald Trump is much less audacious a President than some expected. The question is why. About two months ago, I surmised […]
Ever since Donald Trump unexpectedly won the US presidential election, there has been an unending stream of anti-Trump tirades in the media. The emotions creating this wave of criticism make it difficult to have a reality-based view of the potential economic consequences of a Donald Trump presidency. So I am going to try to frame four issues of concern on an international level here that I think are relevant: Trump’s proximity to Russia, Trump’s proximity to big business, Trump’s hawkishness on China, and Trump’s hawkishness on Mexico.
Some of the largest natural resource exporters with floating exchange rates have seen their currencies come under significant pressure over the past year.
By Win Thin and Ilan Solot Despite the growing tensions in Thailand and the risk of military involvement, equity indices stared off the week higher and THB stable. There is some optimism that a possible delay to the February 2 vote could open up space for some sort of compromise. […]
In many different emerging markets, the economy has unexpectedly weakened. We are seeing downturns everywhere from Mexico and Brazil in Latin America to Indonesia, India and Thailand in Asia. At this point there is no common thread on why the weakness is so widespread but the most troubling country is India.
The US dollar stands at the fulcrum. Investment flows are leaving emerging markets, with currencies from Brazil,India,Indonesia and Mexico being hit the hardest over the last few sessions. The MSCI Emerging Market Index is off 4.5% over the past five sessions and the rout continues.
Fundamental and technical considerations are aligned in favor of the US dollar. The latest string of economic data, including the June employment report, is strengthening the market’s conviction that the Federal Reserve will begin tapering its long-term asset purchases later this year and raise the Fed funds target by the end of next year.
The yen bears have been frustrated by a series of developments. They were unpleasantly surprised by news that the Japanese themselves were large sellers, not buyers, of foreign bonds in the first full week of the new fiscal year. In addition, more often than not, since the BOJ’s announcement, the yen has strengthened, not weakened, in the Tokyo trading session. And the yen bears were unable to absorb the yen buying that capped the US dollar just below the psychologically important, JPY100 level.
The economy remains in solid shape, with exports, IP, retail sales all holding up well despite the sharper US slowdown. GDP rose 4.6% y/y in Q1, and is tracking at a similar rate for Q2. Manufacturing PMI rose to 55.7 in June from 54.3 in May, the highest since 2006. New orders component surged to 62.9, the highest level since 2004. Clearly, there is some strong momentum in the Mexican economy, and is likely to keep the central bank in wait and see mode for now.
The latest data out of China will give those expecting a soft landing pause about China’s economic situation. While inflation has come down somewhat of late, so too have industrial output and capital investment. This is creating EM feedback loops which diminish the number of equity, corporate and sovereign plays in this space. Asia in particular should be impacted.
FX intervention is certainly in the air this week for Latin America. Brazil stands out as the most aggressive, of course, as the central bank intervened in the forward market Friday and in the spot market Monday.
Given what we see as a basically hands off policy with regards to the exchange rate when MXN is appreciating, we see more potential upside for MXN compared to, say, BRL, where Brazilian authorities are clearly going to work against further currency strength. Others in Latin America are concerned with currency strength, including Colombia. As such, going long MXN vs. BRL or COP would be a good alternative too. On the other side, Banxico has installed circuit-breakers to help boost peso liquidity during times of stresses as part of an effort to prevent disorderly downside movement in the peso.