MNI China Daily Summary: Wednesday, July 10

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CHINA PBOC CONDUCTS CNY2 BILLION VIA 7-DAY REVERSE REPOS WEDS

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USDMXN Extending Lower, Analysts Expect Cautious Easing To Delay Peso Turnaround

MEXICO
  • USDMXN has continued to sell off on Wednesday, with the most recent turn lower for equities and a slightly firmer dollar doing little to hamper the pairs descent. As pointed out, today’s technical deterioration is meaningful, with the break below key support maintaining the price sequence of lower lows and lower highs, all suggesting scope for a move to 16.4218, a Fibonacci projection.
  • Goldman Sachs note that MXN carry has not declined as fast as in other LatAm FX heading into the first Banxico cut, and expect further cuts to be cautious and sensitive to FX performance. Therefore, MXN remains among their preferred high carry (and carry-to-vol) expressions within EM FX.
    • GS said “while its overvaluation signal at current levels constrains the scope for significant spot appreciation, equally in an environment of strong US growth and equity performance, it is difficult to see MXN depreciating meaningfully, implying that carry is likely to be a meaningful contribution to total returns”.
  • BBVA’s base-case is for the MXN to eventually depreciate, with domestic and US election uncertainty being catalysts, but also driven by the loss of carry as Banxico continues its rate cuts. However, the markets have remained extremely resilient, and BBVA note the immediate risks appear to be contained for now given the pricing of steady cuts by Banxico and the distance from the US vote.
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