Distortion in CPI data expected
The US dollar has reversed gains as investors’ confidence in Trump’s tax reform fell again. After sliding as much as 1.50% since the beginning of the week, the dollar index consolidated slightly above 93 on Friday morning. However the week is far from over, the market is awaiting the release of fresh inflation data. Investors have revised their inflation expectations to the upside in September. Median forecasts for the headline measure inched up to 2.3%y/y, compared to a print of 1.9% in the previous month, in anticipation of side effects from the series of storms that hit the US during the month of September. Core inflation is expected to have risen but in to a smaller extend as investors anticipate it will print at 1.8%, up from 1.7% in August.
After contracting 0.2%m/m in August, retail sales are expected to have picked up in September with median forecast standing at 1.7%m/m. Retail sales excluding auto and gas should also recover with markets anticipating a pick-up of 0.4%m/m. Similarly, the impact of Hurricane Harvey will significantly impact the data. The challenge is to filter out its effects, an almost impossible task given the effects result from a broad range of factors as it distorted the demand for various goods and services and also impacted the oil production along the Gulf Coast.
Since even the core measure is anticipated to be biased, the investors will take the report with a grain of salt. The key USD driver at the moment will remain the upcoming rate hike, which will probably take place in December, and Trump tax reform. Neither is a done deal and by far. Against such a back, further dollar weakness has to be seriously considered. However in the medium-term, we remain dollar positive.
Brexit negotiations: Tensions are coming back
Brexit Negotiations are back into centre stage. The EU 27 Leaders are meeting today in Brussels to discuss about the further trade agreement with the UK. This promises to be intense as 27 Countries that must agree seems like a very difficult task. It is obvious that each one of the EU members does not have the same interest and the same relationship with the UK which will are making the overall EU position on trade relations very fragile.
We do not believe that the ‘No deal’ will be the final conclusion of the Brexit negotiations. We rather believe that the lack of unity within the European Union will benefit to the UK. The EU are definitely trying to play tough by blocking trade talks by asking the UK to first secure three main points: a guaranteed citizens right for EU citizens, a cash settlement of around 10 billion pounds and the Northern Ireland Border.
The ‘No deal’ issue which we consider a lose-lose scenario is however not likely according to us. In our view, EU economic difficulties (massive debt, Greek issues, immigration) will definitely help UK achieving an agreement. Catchphrases from both sides are definitely driving tensions higher.
MXN to weaken further
The Ottawa round of NAFTA negotiation have turned nasty. The first causality has been the driving ethos of globalizations and cooperation, replaced with strong protectionist bias. In this negative environment, missteps were bound to occur. MXN was rocked (despite of wide spread EM strength) as news that Mexico’s Finance Minister Meade was developing trade alternatives and tariff measures in case the NAFTA negotiations disintegrated. In additions the US assistance of inclusion of a ‘sunset clause’ that would allow for the agreement renegotiation every five years. Rumors have plagued discussions that Trump was having side conversations with Canadians Trudeau on potential bilateral agreements.
All side quickly dismissed the ‘fake’ news saying it was critical to secure a multilateral agreement between all three nations. However, the optics of smiling Trudeau and grimacing Meade are telling. In our view, the probability of the full blow break up of NAFTA has increased significantly. Further MXN depreciation is expected, as markets has not incorporate fully the necessary risk premium. Breaking up NAFTA was a popular theme on Trump campaign and remains an area he has near total control over. USDMXN break of 200d MA suggest extension of bullish momentum towards triple top resistance at 19.25.
