1. Where are the pain trades / overcrowded positions?
Since last week, the 2y-5y sector in TIIE experienced a 20bp selloff, fueled both by developments in the US (strong data, hawkish Fed speakers), and locally by an interview where Banxico member Jonathan Heath delivered more hawkish remarks than expected, in contrast with a more dovish blog post he had published a couple weeks ago. With low summer liquidity, the curve gapped higher a few times until a trading level finally materialized. It seems there are still players trying to fade the hiking cycle and thus the pain trade is likely for rates to creep higher again. In spot, hedge funds have started to buy USDMXN again though overall positioning is by no means crowded. 20.20 is the next resistance on the topside.
2. What looks especially rich or cheap?
While the front end has now repriced higher (160bp in ly versus 150bp last week, and 210bp in 2y versus 200bp last week), ultimately the risk is still towards a deeper/more front-loaded hiking cycle than is priced at the moment. Inflation has continued surprising to the upside since Banxico's last decision, and globally central banks have sent more hawkish signals. The desk still likes paying dips in THE.
3. Which market events will be pivotal for FX?
The main event this week will be Banxico's monetary policy decision, to be released on Thursday at 14:00 New York. Market consensus is for a 25bp hike, in line with UBS Economics and with the desk's view. Banxico will include two new features in their statement: their inflation forecast for the next eight quarters, and the voter breakdown. The market's base case is for another 3-2 vote, with a 4-1 or 5-0 vote resulting in a hawkish surprise. Given the recent upwards surprises in inflation, it is unlikely the tone of the statement can become more dovish, for example signaling that a pause in Q3 is likely. However, the board could reiterate the idea that this will not necessarily be a full cycle (as they did in the previous cycle).
4. Where are clients focused?
Flow in TIIE has been paying in the belly of the curve since the non-farm payrolls number on Friday. Views in the front end are divided at these levels. Client interest in spot has been skewed towards net better buying of USDMXN led by hedge fund accounts. FX swap interest leaned towards net better sellers with short-end cross-currency reaching multi-year lows. The market has since recovered from those levels fairly aggressively
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