USD doldrums continue
03 December, 2023
• Fed speak. Some measured comments by Chair Powell & weaker ISM data reinforced expectations the next move by the Fed could be a rate cut.• USD weaker. The drop in US bond yields has exerted more pressure on the USD. AUD has risen back up to the top of its multi-month range.• Event radar. Locally, the RBA’s last meeting of ’23 & Q3 GDP are due. Offshore, focus will be on US labour...
Canadian jobs growth tops expectations, but details point to slowdown ahead
01 December, 2023
The Canadian job creation engine topped forecasts in November, firming expectations for another hold at the Bank of Canada’s meeting next week. 25,000 new positions were added in the month, with population growth and still-high participation rates pushing the unemployment rate to 5.8 percent, up from 5.7 percent in October. Consensus estimates had pointed to a 15,000 new hires, with unemployment rising...
The peso’s bull run has run out of steam.
01 December, 2023
After a world-beating drive higher, the Mexican peso lost momentum late in the third quarter and has largely failed to regain it, staging a relatively modest rebound against a retreating dollar. Several factors are in play: A drastic increase in government spending plans – coming ahead of the presidential election in June 2024 – spooked investors. The foreign exchange commission’s decision to unwind...
The fiscal outlook still looks favourable.
01 December, 2023
Under President Andres Manuel Lopez Obrador’s recently unveiled budget plan, Mexico will run its largest deficit since 1988 next year – amounting to roughly -4.9 percent of gross domestic product, up from this year’s -3.3 percent. With global interest rates holding near post-2000 highs, higher borrowing costs could threaten credit ratings and limit the next government’s room for maneuver.
But...
Nearshoring hopes look overdone.
01 December, 2023
With geopolitical tensions between the US and China forcing businesses to diversify supply chains, the country’s stability, low labour costs, and geographic proximity have raised hopes that a “Made in Mexico” moment is at hand. Indeed, the country has displaced China as the United States’ largest trading partner.
Share of US imports, 12-month moving average, %
But under López Obrador,...
Canada's economy is slowing.
01 December, 2023
With higher borrowing costs and slowing credit growth inflicting serious pain on Canada’s spectacularly indebted private sector, the economy appears poised for a hard landing.
The direction of travel for residential investment is clearly down: after an early-2023 dead-cat bounce, prices and activity levels are subsiding across the country, and developers are moving to the sidelines. Energy prices...
Expectations are falling.
01 December, 2023
Market illusions about the relative resilience of Canada’s economy have been exhausted in recent months, and swap-implied rate projections for the Bank of Canada and the Federal Reserve have converged in a dramatic fashion. Yield differentials and the loonie have come under sustained pressure, with central bankers on both sides of the border now seen delivering rate cuts at a roughly-similar pace through...
Key supports remain intact. For now.
01 December, 2023
Most of the factors driving the peso’s post-pandemic outperformance are still in place. Implied interest rate trajectories suggest that Banxico will cut more slowly and more incrementally than its Latin American counterparts, leaving the currency with one of the best volatility-adjusted carry profiles in the region.
Carry Return Index, 1999 = 100
Remittance volumes keep setting new records....
We're tactically constructive.
01 December, 2023
Over the next month or two, we think economic surprise indices will soften in the United States, with consumer spending and labour market measures weakening relative to still-optimistic market forecasts. Global financial conditions should ease as US yields stabilize, and expected growth differentials should narrow, adding momentum to an already-underway portfolio rebalancing process in major investment...
A US slowdown remains a clear and present danger.
01 December, 2023
We think the peso could temporarily outperform as the Federal Reserve accelerates its communications pivot, but fundamental vulnerabilities should exact a toll over the longer run, contributing to generalised weakness toward the latter half of 2024.We think a sustained period of outperformance in the US economy will fade in the coming months, with the peso likely to come under selling pressure in early...