From the Floor: USDMXN mounts Trump wall to new high — #SaxoStrats#SaxoStrats
- USDMXN hits fresh new high as Mexico's president cancels Washington trip
- Trump warns Mexico it will pay for border wall through levy
- EURUSD holds ground below key 1.0800 area — Hardy
- US earnings season continues progress towards six-year best — Garnry
- Google parent Alphabet shares slip despite beat on Q4 revenue — Garnry
- Global yields spike higher, European peripherals widen — Fasdal
War of words
USDMXN fleshed out to a new, all-time high overnight as the war of words between US president Donald Trump and his Mexico counterpart Pena Nieto became a full-on conflagration.
The wall on Mexico's border is at the heart of the chasm between the two neighbours and Trump's assertion that Mexico must pay for the wall through a 20% levy on goods into the US was the straw that broke the back of the camel for Nieto, who cancelled his trip to Washington.
"It will be interesting to watch if there is a declining impact on the peso," says Saxo Bank's head of forex strategy John J Hardy. "The peso is incredibly cheap and it requires a continuous onslaught of negative information to get weaker and that suggests an asymmetric risk of a very significant bounce."
USDMXN peaked at the 21.37 area in the hour before the European open. The pair has appreciated to the tune of approximately 35% since the summer of 2015 when Trump announced he was entering the presidential race.
If ever a picture painted a story....
The peso's travails were hardly helped overnight by a return to dollar strength which helped it push back against yen, euro, China's yuan, and sterling on the day Theresa May hitches up into town to get the 'special relationship' back into gear again.
"The dollar was firm yesterday [but] perhaps people are just taking profit with dollar long positions ahead of next week's Federal Open Market Committee meeting and the nonfarm payrolls Friday," says Hardy. "It's a pretty straightforward consolidation but the key is that it came in EURUSD and USD index terms around some really key levels of support for dollar."
"I think we're drawing a line in the sand and we either need to see the dollar start to pick up steam or it's going to be capitulation over the next week-to-week timeframe."
USDJPY could prove particularly instructive, says Hardy, after the Bank of Japan raised its buying of government bonds in the 5-10 year range.
"The BoJ is not just just interested in just certain sums of buying or being committed to certain sums of buying; they’re committed to controlling yields."
BoJ government bonds buying is flavouring USDJPY:
Nice lil' earner
US corporate earnings continued to stretch towards a six-year best overnight with Microsoft shares rising 1.5% and Google-parent Alphabet beating its fourth-quarter estimate. That wasn't enough to stop the share prices slipping 2% but Saxo Bank's head of equities strategy Peter Garnry still sees a strong outlook into 2017.
"Alphabet got a very solid beat on revenue and capex is up 46% year-on-year," says Garnry. "Google has a very strong outlook and there is massive uptake on many of their businesses. I think this is computers reacting as opposed to reading between the lines which shows a very strong performance."
The focus shifts next week to Europe, says Garnry, where only 10% of companies have reported.
"The earnings season looks a little bit weaker in Europe than in the US but that fits with the overall macro picture as there is a lagging effect from the global economy into the actual accounting numbers so I suspect Q1 will be the major turning point for European earnings," says Garnry.
Global yields spiking
Global equities continue to spike higher accordingly, with the Trumpflation trade continuing to underpin the market.
"We've seen some risk consolidation and the overall bearish trend looks here to stay with European peripherals starting to lose momentum especially to German bunds," says Saxo Bank's head of fixed income Simon Fasdal. "Italy and Portugal are especially having a hard time while Spain is actually doing OK."
The overall takeaway is that the European Central Bank is trying to push back any calls for a QE exit but there is a discussion and conflict within the ECB regarding tapering QE," says Fasdal. "Investors do not like to be caught off guard and it is very natural then that we see these spikes as these countries would trade very differently without the support of QE."
The contrasting fortunes of Italian and Spanish bonds vis-a-vis German bunds:
It's the lunar holiday in China today which means activity in Asia might be rather muted for the next week or so. One can't help feeling though that president Xi Jinping will have his eyes firmly fixed on Theresa May's meeting this afternoon with US president Donald Trump.
Martin O'Rourke is managing editor at Saxo Bank