Peso Slumps on Growing Trade Tension

Daily Analysis - 27/01/2017

War of Words Between US and Mexico Heats Up as Trump Plans for Border Wall


After a day of back and forth between US President Donald Trump and Mexican President Pena Nieto, a decision by the Mexican leader to not attend an upcoming meeting with the US government suggests that a trade war may be brewing as the Trump administration forges ahead with plans for a border wall.

US-Mexico Relations Hit a Snag

Following the move by the Trump administration to begin planning to erect a security wall along the US-Mexico border in an effort to secure the border, heightened rhetoric of who would pay for the wall has caused a deep rift between the two nations.

After originally planning to meet Trump in Washington on Tuesday, Mexican President Pena Nieto has since canceled the gathering amid the revelations that the US government may present a border tax to pay for the construction.  Although still unconfirmed, the Trump administration is allegedly considering a 20.00% tax in a move that may completely sink the NAFTA agreement.

Considering Mexico has the most to lose from any renegotiation or elimination of NAFTA and none of the leverage, the Peso may find itself under renewed pressure over the medium-term as trade relations sour further, with the USDMXN pair once again trending towards record highs.


Yen Falls as Deflation Slowly Ebbs

Data from Japan overnight showed that broad-based improvements in the country’s inflation measures remain elusive as gains in the core figure were offset by a slight dip in the headline data.  On an annualized basis through the end of December, consumer prices rose by 0.30%, beating expectations of 0.20% but printing well below the 0.50% reported a month earlier.

On the other hand, the core inflation figure which strips out the more volatile food component of the headline figure should some progress, shrinking by a more modest -0.20% versus the -0.40% annualized contraction recorded during November.

Nevertheless, despite the mixed outlook for inflation, a notice of increased asset purchases from the Bank of Japan was enough to send the Yen tumbling versus peers, with USDJPY climbing as much as 75 pips overnight before pulling back modestly but remaining above 115.00.


US New Home sales Slip

With interest rates climbing and set to rise, casualties in the housing market have already emerged.  The latest data from new home sales suggesting that buyers are starting to drop out amid rising financing costs, with sales falling to 536,000 in December from an upwardly revised 592,000 reported a month earlier.

Besides missing expectations by a wide margin, the data also echoes existing home sales numbers reported earlier in the week which showed the annualized pace of turnover of already built properties sliding to 5.49 million from 5.65 million during November.  Aside from interest rates, the other factor that is potentially emerging as a problem for US housing is increased Chinese capital controls which may reduce foreign purchases of US properties.

The rally in US equities faded on Thursday, with the S&P 500 trending flat unchanged heading into the GDP figures due later in the session.


UK Shows Strongest Growth Amongst G7

While there was widespread concern heading into the British referendum about the implications of a move to leave the European Union, the gloomy predictions of the impact on economic activity have still not materialized as evidenced by the latest GDP figures.  Data released by the UK Office for National Statistics on Thursday showed that the economy grew by 2.20% during 2016, beating forecasts of 2.10% and marking the fastest pace of growth amongst advanced economies for the calendar year.

On a quarterly basis, growth came in at 0.60% for the final three months of the year, also outperforming forecasts of 0.50% expansion.  Although the outlook remains shrouded in uncertainty as the move to trigger Article 50 approaches, economic activity nonetheless remains robust.

After closing lower on Thursday, the Pound continues to give ground, with GBPUSD extending the previous session’s declines.


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