How Capital Moves Between Core and Perimeter Markets

The Core-Perimeter model maps out macro-investment cycles across the U.S., EU, and China.

*None of the content below constitutes trading or investment advice. This is purely educational material designed for readers to understand broad capital flow dynamics in regional powerhouses. Trade at your own risk.

The Core-Perimeter framework provides a structural lens through which traders and investors can interpret macro-fundamental relationships. By mapping capital flows and risk appetites across these economic fault lines, it offers a strategic blueprint for positioning in global markets.

The global economy is anchored by three dominant powerhouses: the United States, China, and the European Union. Each serves as the gravitational center for a surrounding set of perimeter economies—export-driven markets whose trajectories are tightly bound to the performance of their core counterparts.

These economies, more sensitive to fluctuations in the global business cycle and shifts in investor sentiment, experience more pronounced volatility in both directions.

Perimeter assets, by nature, offer higher yields to compensate for the increased risk investors assume. In times of global economic optimism, when markets prioritize returns over security, capital flows outward from the core to the perimeter, seeking exposure to these higher-yielding, cycle-sensitive assets. This dynamic fuels investment in export-driven economies, reinforcing their dependence on global trade flows and external demand.

Conversely, during market downturns, capital retreats from risk. Investors shift their focus from yield generation to capital preservation, triggering outflows from the perimeter and into the relative safety of core economies. This defensive rotation amplifies financial stress in export-oriented markets, reinforcing the asymmetry between core stability and perimeter volatility.

United States

Mexico

The economic relationship between the United States and Mexico is defined by both geographical proximity and structural asymmetry. Regional trade agreements, from NAFTA to its successor, the USMCA, have institutionalized their interdependence, but the fundamental disparity between the core (U.S.) and perimeter (Mexico) economies persists.

As the world’s largest economy, the United States is predominantly consumer-driven, making it less susceptible to the volatility of the global business cycle than an export-reliant economy like Mexico.

The latter’s growth trajectory is tightly bound to U.S. demand, with approximately 86% of Mexico’s cross-border sales flowing north. This structural reliance reinforces Mexico’s exposure to fluctuations in the U.S. economy, amplifying both the opportunities and vulnerabilities inherent in this economic relationship.

When the U.S. economic outlook is strong, rising demand for Mexican exports drives capital flows from core to perimeter. This trend is reinforced by investors seeking exposure to the cyclicality of peso-denominated assets, which offer the potential for outsized returns in a bullish environment.

Under these conditions, the USD/MXN exchange rate typically weakens as capital moves south. This dynamic is further amplified by heightened risk tolerance, as investors are more willing to hold cycle-sensitive assets when economic conditions are favorable.

However, when growth prospects deteriorate, capital flows reverse. Investors unwind positions in riskier perimeter assets, redirecting liquidity into the relative safety of the core.

As capital retreats from Mexico, the peso depreciates, strengthening the USD/MXN exchange rate. In the U.S., deep capital markets and abundant liquidity serve as a buffer against volatility, reinforcing the asymmetry between core stability and perimeter vulnerability.

Even when the shock to growth originates in the United States, capital still gravitates toward the core. Investors exhibit a clear preference for U.S. Treasuries and the dollar over their Mexican counterparts, prioritizing liquidity and stability over yield.

In times of uncertainty, the depth and resilience of U.S. financial markets reinforce the structural advantage of the core, driving capital inflows even when the initial disruption stems from within.

Canada

When global economic growth prospects are strong, Canadian assets become more attractive than their safer U.S. counterparts. Their higher cycle sensitivity translates into greater risk but also the potential for superior returns. In this environment, investors prioritize yield over stability, typically leading to a weaker USD/CAD exchange rate as capital flows into Canadian markets.

The structural dynamic between the two economies reinforces this trend. The U.S., as the world’s largest consumer-driven economy, is more insulated from external shocks than Canada, whose export-reliant growth model leaves it more vulnerable to shifts in global demand—particularly from its southern neighbor.

Over 74% of Canada’s cross-border sales are directed to the U.S., while only about 12% of U.S. exports flow in the opposite direction. This asymmetry magnifies Canada’s exposure to U.S. economic conditions, further shaping capital flows and exchange rate dynamics.

When U.S. growth prospects are strong, demand for Canadian exports rises, expanding trade flows between the core and perimeter. As goods move south, capital moves north, strengthening the Canadian dollar.

This trend is reinforced by investors seeking exposure to CAD-denominated assets, which, due to their cycle sensitivity, offer the potential for higher returns. Under these conditions, the USD/CAD exchange rate typically declines as capital prioritizes yield over security.

However, when an economic shock—whether a financial crisis or a policy-driven slowdown amid a viral outbreak—disrupts growth, capital flows reverse. The result is a stronger USD/CAD exchange rate as investors unwind positions in riskier Canadian assets, shifting funds back to the core.

In a risk-off environment, the depth and liquidity of U.S. financial markets provide a relative safe haven, driving capital toward the dollar and away from the more cyclically sensitive Canadian economy.

This dynamic is further reinforced by the U.S. dollar’s status as the world’s primary reserve currency, making it the go-to safe haven in times of uncertainty. Its unparalleled liquidity dampens volatility that would otherwise be more pronounced in the less liquid markets of the perimeter.

The 2008 global financial crisis serves as a stark example. Despite originating in the U.S., the dollar surged as investors prioritized stability over proximity, directing capital flows toward the deep liquidity of the core rather than the more vulnerable perimeter economies.

Europe