Morning Commentary: Joining the Herd

Foreign Exchange - Morning Commentary
Joining the Herd
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday afternoon, Banxico, the central bank of Mexico, technically surprised the markets with a 25 bps rate cut in a 4-1 split decision.  However, in truth, the move wasn’t that big of a surprise as a decent amount of the market was looking for a rate cut. 
The bigger surprise was found in the statement.  In deciding to cut rates, Banxico gave a nod to market pressures and acknowledged that a weaker currency was welcome given the deeper-than-expected economic slump and easier monetary policy conditions.  In broad terms, it appears that Mexico is moving towards the global trend of dovish central banks.  By responding to cyclical factors, instead of structural factors, Banxico has adopted a dovish stance and hinted that Mexico has kicked off an easing cycle.  As such, expect further cuts later this year with Banxico’s September meeting increasingly in play especially if the Fed cuts rates the week before.
Over in the US, the 10-year yield dropped down to ~1.47% before yields pushed back higher.  While yields were dropping throughout the session yesterday, the move down to ~1.47% came during a sharp drop that quickly reversed.  One of the catalysts for this move was speculation that the Fed could make a rare inter-meeting move given the deterioration in the global economic picture.  However, James Bullard, one of the most dovish Fed members, threw cold water on the idea.  On this point, we agree with him.  The Fed meets roughly every six weeks.  The timing of a cut, should the Fed choose to deliver one, is not that sensitive that a couple weeks one way or another would make a difference. 
In the near term, the bigger difference will most likely be Jay Powell’s remarks at the global central bank symposium next week.  Recent economic data supports Chair Powell’s forecast of solid economic growth and higher inflation, and markets will be interested in how recent data plays into Powell’s rate path outlook.  Most likely, recent data will help settle the debate between a 25 or 50 bps cut rather than whether or not to cut.  The global economy remains characterized by globalization.  As such, the Fed has to also consider global data as well as expectations for future data.                
  • The British pound is up sharply on the session on headlines that opposition leader Jeremy Corbyn has made an appeal to other UK parties to make him a caretaker PM in order to stop a no-deal Brexit. 
  • US housing starts came in weaker than expected, printing 1.19M starts against expectations for 1.26M starts.
  • Japan has overtaken China as the biggest holder of US Treasuries.  Strong and consistent purchases of foreign bonds from Japanese investors have been a key theme this year with Japanese investors net purchasing 173 billion worth of foreign debt this past week.
  • The BoJ cut the amount of 5 to 10-year debt during its regular debt buying operations in a sign that the BoJ is becoming uncomfortable with how low Japanese yields are. 
  • Trade tensions eased a bit overnight as Donald Trump indicated that he has a phone call coming up with China’s Xi Jinping. 
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