The dollar is mostly softer, but
turnover is mostly quiet. The Swedish krona leads the move after
higher-than-expected underlying inflation. It is a mild risk-on day with
equities moving higher too. In the Asia Pacific region, China stood with
the CSI 300 up almost 2.5%. Europe’s Stoxx 600 is up fractionally to
recoup most of the pre-weekend decline. US equity futures are narrowly
mixed. European bond yields are little changed, with a couple of
exceptions: Sweden 6-7 bp higher on the back of the inflation and UK
yields a few basis point softer even though the UK is expected to report its
large January budget deficit in a quarter of a century tomorrow.
China
indicated it will propose a peace plan for Russia-Ukraine on February 24, the
anniversary of Russia’s invasion. It says it territorial integrity must
be preserved and the UN Charter, but Russia’s security needs must be
recognized. It is not exactly clear what it means, and it comes as the US
says Beijing is considering providing Russia lethal aid, which sounds partly
like a diplomatic creation as China, India, and Turkey buy Russian oil giving
it money to purchase lethal aid from Iran, for example. Is it hard to
picture a quid-pro-quo, like the missiles in Turkey that were removed (quietly)
after the Cuban Missile Crisis? Imagine China says we will not provide
lethal aid to Russia is the US stop providing lethal aid to Taiwan.
Meanwhile, Europe is discussing a joint effort to buy ammunition.
As expected,
China left its loan prime rates steady but separately, reported the first
year-over-year increase in foreign direct investment since last June.
There is some
optimism that a deal on the Northern Ireland protocol is at hand. Prime
Minister Sunak is expected to update parliament as early as tomorrow. It
seems like a key issue, which the EU does not seem prepared to budge on is the
role for the European Court of Justice. In his rush to get a deal done,
former PM Johnson has committed to scrapping the ECJ’s role. The Democratic
Unionist Party in Northern Ireland is not keen on Sunak’s proposals, which
recognize the role of the ECJ. The DUP refuses to take part in the
Northern Ireland power sharing arrangement created by the Good Friday
Agreement, which is 25-years old this April. Since the ECJ’s actual role
is minimal this issue may really be symbolic.
The Mexican
peso has been on fire. It is the strongest currency here at the start of
2023. Wide interest rate differentials speak to the carry, while Bolsa
also appears to be drawing funds. Foreign direct investment is also
demand for the peso. The overnight target rate is at 11.00% and the
Deputy Governor Heath of the central bank said the terminal rate may be
11.25%-11.75%. The swaps market puts it at the upper end of that
range. The dollar settled last week (~MXN18.3720) at a low since 2018 and
below the lower Bollinger Band (~MXN18.3855). I have been suggesting a
medium-term target near MXN18.0. As one would imagine with the sixth loss
in seven sessions, the dollar is stretched. In corporate news, Femsa
(among other things, the largest Coca Cola bottler in Mexico) is paring its
Heineken stake (ostensibly favorable for the peso) but may consider the
purchase of a US convenience store chain (peso negative). It is
consolidating today, with the greenback a little firmer around MXN18.43.
Initial resistance may be in the MXN18.45-MXN18.50 area.
Indicative
ranges through the European morning: Euro $1.0673-$1.0705,
JPY133.95-JPY134.55, Sterling $1.2015-$1.2057, CAD1.3450-CAD1.3495, Australian
dollar $0.6857-$0.6919.
Tuesday
features the preliminary February PMI, minutes from the recent Reserve Bank of
Australia meeting, and the German ZEW survey. In addition to the
flash PMI, the US also seeing existing home sales. Canada reports retail
sales and CPI.
Disclaimer
Reviewed by Marc Chandler
on
February 20, 2023
Rating:
