Mixed performances for EM FX

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A surprise rate hike by Mexico’s central bank yesterday caused the peso to rise by 1.6% against the USD yesterday, with the Brazilian real also doing well. The strong performance of Brazil’s currency, where the central bank has also been hiking, stands in sharp contrast to the performance of the Turkish lira, which continues to depreciate amid the more dovish central bank actions there. Most analysts expect further rate hikes from Mexico and Brazil, which could lead to further FX divergence.

Macro

US initial jobless claims fell to 411,000 last week, while continuing claims increased to 3.4mn in the week before.

US durable goods orders rose are doing extremely well – hence all the upward pressure on goods prices.

The German Ifo survey expectations component rose to 104.0 in June, the strongest since after the Great Recession.

The UK central bank kept policy unchanged yesterday, but traders think that tightening is growing ever so slightly nearer – not that much nearer though, given the 12-month overnight index swap is still slightly below the policy rate of 0.10%

Mexico’s central bank surprised analysts with a 25 bp rate hike – probably a sign of more to come.

Markets

US equities are at new all time highs.

Cyclicals have been leading the way.

A broader selection of risk-on assets has not done quite as well though, partly due to the recent fall in copper prices and the AUD.

Traders still seem to be concerned about the prospect of a price correction, given the elevated level of the SKEW.

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