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The FOMC would like to see more hard data which indicate that the US economy is really heading for a growth rate of 2% and that inflation is accelerating towards the 2% target as well.
Yesterday’s release of the FOMC minutes brought some relief for the Mexican peso, which had been under pressure in the earlier part of yesterday’s session.
However, we fear that the peso trades as a proxy for deteriorating emerging market sentiment, due to its low cost of carry, correlation with the oil price and low transaction costs.
The dollar came under pressure after the minutes of the Fed’s July monetary policy meeting, released on Wednesday, showed that policymakers were still divided over the need to raise interest rates this year.
Given moves in the likes of BRL in recent days, one wonders whether EMFX markets are going to take a breather over the coming days from what has been a blistering rally since the Brexit vote.
In our view investors should wait for Yellen’s speech in Jackson Hole next week before deciding upon a direct course of action, but in any case it makes sense to tighten stops on long EM positions. All good things come to an end eventually.
It seems to be clear that it would probably take the FOMC until December to gather sufficient hard data on growth, the labor market and inflation to hike the Fed funds rate. The Fed wants to be 200% sure before taking another rate step. The dollar has come under slight pressure after the release of the minutes and will probably not receive sufficient support.
USDMXN has declined from the highs of 19.5174 to the current 19.0791 levels, loss of almost 7.4% in just two and half months and technicals are indicative of further dips in the days to come.
