At face value much of the price action during yesterday’s session seems illogical. Whilst trying to provide some kind of explanation to these trading patterns, it must still be admitted that many moves yesterday were asymptomatic of the dominant news flow. Two of the stand out moves from yesterday’s session were gains within the US dollar and Mexican Peso. The former’s move higher making the latter’s concomitant climb all the more surprising.
The Dollar was kick started into life yesterday following the 1:30 BST release of CPI data. The reading showed year on year inflation record lower than many sources had claimed to be the median estimate. Ordinarily, this would be reason alone for a significant sell off in the Dollar, particularly at a time when markets are so sensitive to interest rate differentials. However, the Dollar’s climb following the release was strong and unilateral. This has to be down to the devil hiding in the detail. The components of CPI, showed a far stronger systemic legacy of core inflation than expected.
Beyond the influence of predictable factors, core inflation appeared more resilient than expected. With the climb of the Dollar attributable to attentive markets, how about the Peso? Recall that it was the fear of state capture through judicial reform that was the key factor that drove the post-election Peso lower. Yesterday delivered undeniable progress on such reforms that could have been expected to weigh on the Peso. However, at least during yesterday’s session, progress made on such reforms hasn’t hampered the Peso. Rallying below 22.00 in EURMXN and 20.00 in USDMXN, MXN has defied political risks despite receding Fed expectations. With the odds of a 50-basis point September hike fading at the Fed, the outlook is skewed against the Peso.
Discussion and Analysis by Charles Porter
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