While resurgent volatility suggest that risk asset are still in jeopardy, in general high beta FX have not been materially affected. S&P 500 saw all sectors close down over 300bps as US yields rallied yet FX remained stable. This lack of contagion to us indicates that stock are not going to go much lower as this is a technical correction rather than a structural shift. In the FX EM Mexican Peso is increase becoming attractive. Banxico raised interest rate 25bp while providing a hawkish tone signaling that more hikes are likely. Inflation has come down marginally yet weaker MXN is could change this trend.
It’s unlikely given domestic and global environment that inflation will come down meaningfully. We don’t see any dovish policy communication until 2019 and could see rates peak at 5.75%. Also, we continue to see a soft NAFTA result. Despite Trumps feet stomping US – Mexico trade economy is deeply integrated. Any action would have complex result and most can be easily circumvented. We would see current USDMXN strength as an opportunity to reload shorts.
