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Mexico: No real economic reason for a hawkish Banxico - TDS

According to analysts from TDS, the Bank of Mexico will not raise rates tomorrow, but it will move in September, following the Federal Reserve rate hike.

Key Quotes:

“A negative output gap, tame inflation expectations, and weak external demand imply no pressing real economic reason for a hawkish Banxico.”

“Regardless of why Banxico cares about MXN volatility, the fact remains that policy makers do care, and the past couple of weeks of trading make this obvious. Indeed, two weeks ago Governor Carstens remarked in an interview that MXN was undervalued and had room to gain. It is highly unusual to hear an emerging market central bank governor sound bullish on their currency, outside of a period of adverse pressure, and so these comments are telling.”

We expect the next rate hike in September, following the Fed’s next rate hike move.”

We expect Banxico to remain on hold at 3.75%, given no real (domestic) economic reason to raise rates at this point.”

“The volatility of the past two sessions, combined with the Governor’s suggestion of MXN undervaluation, implies that the Banxico decision may be nuanced by rhetoric aimed at currency volatility. Market perception of the risk of MXN weakness has spiked significantly as the 25-delta risk-reversal for USDMXN is showing price behaviour unlike other high-beta EM currencies over the past two sessions. This may send a signal to Banxico that the market is showing some potential to become unhinged, and thus may require some official jaw-boning.”

US: Solid expansion in the service sector - Wells Fargo

Today’s report on ISM non-manufacturing showed the strongest numbers for the year. According to analysts from Wells Fargo, the numbers signaled a solid expansion in the service sector.
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USD/JPY: the broad shift in in the USD - Scotiabank

Analysts at Scotiabank explained that Japan’s local holiday has left JPY vulnerable to whipsaw movement and a series of erratic Asian session swings hints to the potential for a shift in its vulnerability from knee-jerk JPY strength (USD/JPY drops) to knee-jerk JPY weakness (USD/JPY spikes).
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