TD bank introduces a short CHF/MXN trade in its model portfolio, relying on numerous indicators and market conditions to project a trend towards the recent range lows in the forthcoming 1-2 months.
Fed's Stance on Inflation: The U.S. Federal Reserve's recent comments hint at a more cautious approach, suggesting they're in a "wait and see" mode. Encouraging payroll data have bolstered the notion of a possible economic "soft landing" and prolonged economic stability rather than an immediate Fed rate hike.
CHF/MXN Pair's Attractiveness: The pair emerges as a standout in TD's HFFV model. Signals from their carry and terms of trade baskets also favor the CHF/MXN.
Market Volatility and Risk Appetite: Carry strategies, which involve borrowing in a currency with a low-interest rate and investing in one with a higher rate, typically thrive in environments characterized by low volatility and an appetite for risk. Although recent weeks have deviated from this norm, the tide appears to be turning. Factors like China's anticipated fiscal stimulus and a stabilization in macroeconomic data may counteract the USD's ascent.
Potential Risks: The escalating conflict in Israel looms large as a potential disruptor. An intensified situation could spike the demand for safe-haven currencies like the CHF. However, any impact on terms of trade might tilt in MXN's favor.
Drawing insights from TD's analysis, their decision to short CHF/MXN is informed by a combination of Federal Reserve sentiments, the pair's performance in their financial models, and global risk dynamics. However, geopolitical tensions, notably in Israel, are wildcard factors that could influence the trade's outcome.