Banxico set to raise rates

Forex News and Events

Mexico: following in the footsteps of the Fed (by Yann Quelenn)

Following the Fed’s rate decision we were also expecting the Banxico to increase rates by 25 basis points to 3.25% despite no inflation. Indeed, the Mexican Central Bank has been obliged in the past to carefully follow the monetary policy of its neighbour in order to avoid the narrowing of the gap between the two countries’ benchmark rates. Even if the current state of the Mexican economy looks healthier with GDP for the first three quarters of 2015 averaging at 2.35% year-on-year, the USDMXN has broken 17.00, down almost 14% against the greenback this year. We remain bearish on the peso. The pair should head further north as the situation in Mexico should be appraised in the context of the current US situation due to Mexico’s extreme dependency on the US economy.

The major issue is that Mexico keeps struggling to find investors to exploit its huge oil reserves. Over the past twenty years, the country has not had the ability to invest in its own infrastructures. Therefore, the country has been forced to open up its petroleum business to private and foreign investors. Unfortunately the country has been badly hit by the lingering oil commodity prices. WTI crude oil futures are trading around their 6 year-lows, below $36, against a backdrop of global oversupply.

It is true that the peso has been consistently dropping against the dollar for the past four years. The Fed rate hike will adjust up the demand for the dollar. Mexico is not only struggling with its own economy but also with the high expectations that markets have from the US.

Fed Master-Class (by Peter Rosenstreich)

In what turned out to be a central banker master-class in communication the Fed increased policy rates by 25bp, to 25-50bp, for the first time in a nearly a decade. And the market’s reaction was negligible. Fed Chair Yellen was deftly able to balance hawkish “dots” accompanied with a dovish statement. The net result was that risk appetite has remained firm today with most of Asia’s equity markets trading higher. In a unanimous vote the FOMC communicated their belief that the pace of rate hikes would be “gradual”, but at a steady pace, whilst keeping Fed fund rates low for an extended period of time. The statement rationalized the rate hike by highlighting the “considerable improvement in labor market conditions this year” with the position “the stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.” The committee indicated that each meeting would be “live” and “assess realized and expected economic conditions” indicating the data dependent nature of further policy action. Currently, the projection for Fed fund rates stands around 1.4% by end-2016, which is 50bp above what the rates futures are showing. The Fed emphasized the importance of exchange rates risks indicating that policy expectations could weigh on USD bullish momentum. We are anticipating that inflation will move quicker towards the Fed’s 2% target then the market is forecasting. Our optimistic view is for the Fed to hike rates 25bp per quarter in 2016, which is more than currently priced in to the futures. Our hawkish view against sluggish market expectations (based on strong USD, low oil and imported deflationary pressure) indicates that USD will remain supportive and vulnerable to upside data surprises.

Crude Oil - Falling Again

The Risk Today

Yann Quelenn

EUR/USD has weakened towards hourly support at 1.0796 (07/12/2015 low). Stronger support lies at 1.0524 (03/12/2015 low). Expected to target resistance at 1.1096. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD's medium-term downside momentum remains lively. The pair is riding the downtrend channel. Hourly resistance is given at 1.5242 (13/12/2015 high). Stronger resistance can be found at 1.5336 (19/11/2015 high). Hourly support can be found at 1.4985 (02/12/2015 low). Expected to monitor support given at 1.4895. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is in a short-term bullish move. Hourly support can be found at 120.07 (28/10/2015 low). Hourly resistance at 122.23 (11/12/2015 high) has been broken. Expected to further consolidate. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF is rising toward hourly resistance at 1.0034 (04/12/2015 high). Yet, the technical structure shows a downside momentum. Expected to show further consolidation and decline. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: