USDCOP continues to trade below the 3800 resistance level. Overnight, Moody’s downgraded its 2020 Colombia growth outlook to -7.3% from -5.5% previous, reiterating that government announcements over the remainder of the year will be important for the outlook of country’s credit profile (currently Baa2, stable).
The Fed minutes served as a catalyst for a short-term correction, with USD shorts caught short in the move. The DXY Index has consolidated around the 93 mark, with commodity currencies and gold looking worse for wear. Outside of FX, yields are depressed across the curve but equity sentiment has stabilized. CitiFX Strategy are inclined to fade the move and like GBP higher in particular. US weekly jobless claims will be in focus, while overnight we saw more signs that the US/China trade deal could be intact.
Central banks feature heavily on the calendar today. The ECB minutes are unlikely to follow the Fed, while the Norges Bank was a non-event. The most interesting central bank today is TRY, given recent market volatility and central bank policy. Otherwise we are watching headlines in RUB, BRL, MXN.
OVERNIGHT NEWS
Dollar rebounds, curve bear steepens after FOMC minutes state preference for outcome based forward guidance over yield caps or target (YCT); also commits to using full range of tools and highly accommodative policy for many years
China: Loan prime rates kept unch for fourth straight month (1y LPR at 3.85% and 5y LPR at 4.65%); regulatory authority (NIFC) plans to start direct foreign investment in interbank bond markets from 1 Sept on trial basis; USD/CNY flat at 6.92
OPEC+ urges for 100% compliance of June agreement, says market conditions gradually improving but pace of recovery is slower than anticipated with growing risks of prolonged pandemic; Brent crude -0.7% at $45/b
Nikkei -1.1%, EUR 10y IRS unch at -0.202%, Gold +1% at $1950/oz
The USD is holding onto the bulk of yesterday’s gains prompted by the FOMC
minutes, with a “risk off” mood also providing some support. The pain for USD
bears was both about what the minutes said, and what they omitted to say. There
was no particular sign of a shift to outcome-based forward guidance, no clear
appetite for yield curve control, and no clarity on the policy framework review. The
minutes did, however, cite “considerable risks” to the economic outlook. The positive
USD reaction suggests USD bears had been eager for a more overtly dovish Fed,
while the economic risks helped foster a “risk off” mood. Today sees the release of
the ECB’s minutes for its July meeting. It may be too early for EUR strength to have
crept into the policy debate, but were it to make even a fleeting appearance in the
minutes, yesterday’s EUR weakness could extend.
Risky assets are trading lower post FOMC minutes yesterday with the SPX finishing the day
0.44% lower, Nasdaq -0.57% lower while this morning US and EUR equity are respectively
0.40% and 1.3% lower this morning. The EURUSD is unchanged this morning after a 0.8%
weakening of the EUR yesterday as investors locked in gains on USD short exposure.
The Minutes of the FOMC’s July meeting did not provide much new visibility on the
committee’s long-term framework review, either on its contents or on when it will be released.
We still believe that next week’s Jackson Hole meeting will provide a range of views on a
longer-term policy regime, which is likely to be officially unveiled at the September FOMC
meeting. Please see our economist publication for more details.
In the current environment, we continue to long carry in our Cross-asset portfolio with no
exposure to government bonds (apart from Greece) as we see limited upside for G10
government bonds given their strong YTD performance. In equities, while US equities are
outperforming most markets, benefiting from the recent better earnings realeases and the
weakness of the USD. We continue to see value in our non-US risk allocation.