OVERNIGHT NEWS
* Dollar firms vs G10 and EM, UST 10y steady at 1.65%; Fed chair Powell says US economy at inflection point, “economy about to start growing much more quickly and job creation coming in much more quickly”
* Week ahead: UST 3y and 10y supply today, US CPI tomorrow and retail sales on Wednesday; UK February GDP tomorrow; China foreign trade tomorrow and 1Q GDP on Friday; RBNZ on Wednesday, BoK and CBRT rate decisions on Thursday
* Norway February GDP -0.7% m/m, January revised down to -0.9% from -0.3%; mainland economy contracts 0.5% after 0.8% drop in January; NOK fractionally weaker vs EUR and USD
* CFTC positioning: Euro net longs reduced to 10.5% of OI, lowest since March-20, JPY shorts reduced to 35.3%, AUD longs cut to 3%, CAD to 1.6% and CHF to 7.4%; UST 10y positions flip from net short to net long 2.2%
* Nikkei -0.77%, EUR 10y IRS unch at 0.047%, Brent -0.5% at $62.6, Gold -0.2% at $1,739
Europe’s Covid vaccination rate is falling further behind that of the US and the UK
EMFXMOMSEN signal: The total allocation of our directional models to EMFX decreased again over the past week, driven by equity-driven momentum and FX sentiment. We welcome the lower dispersion across models as it increases the conviction on the signal, especially amid signs of risk premia in EMFX moving closer to recent multi-year lows. The 4-week MA remains close to its lowest level since the COVID-19-related sell-off a year ago (Exhibit 1). On the other hand, other lower-frequency indicators such as our PMI strategy suggest that USD momentum remains strong, especially after strong services readings which make the divergence more striking.
EMFX factor portfolio allocation (EMFXFPA): The portfolio has its largest underweight positions in ZAR, COP and TWD. ZAR as the largest short comes from the equity, curve and value factor suggesting underweight positions, with no change in allocation versus last week. THB exhibited the largest drop as momentum, value and equity flipped. On the other hand, the model favours HUF the most as the currency is the second-cheapest currency while VRP is one of the lowest. See Exhibit 2 for the full FX allocation.
Regime-Switching Model (RSM) and High-Beta Centrality (HBC): Risk appetite remained basically unchanged after last week, with only rates vol declining to any extent (Exhibit 15). Our index is now close to 33%, far from the ‘risk-aversion’ threshold (Exhibit 3). The recent behaviour of the model continues to suggest caution on risk assets, although recent readings suggest less of a concern. On the other hand, our Centrality measure stopped increasing, leaving the carry/HB filter inactive for the week ahead: long carry/HB currencies.
Notes: The “buy” and “sell” signals are purely rule-based trading strategies and only serve as an input in our decision-making framework. The performance data provided in this document is a hypothetical illustration of mathematical principles; it does not predict or project the performance of an investment or investment strategy. Past performance is no guarantee of future results.
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USD reversal stalls
The USD ended up underperforming all its G10 FX peers, bar the GBP last week. While the beginning of a new
quarter may have called for fresh catalysts following the 1Q21 resurgence, the pause seen in long-dated UST yields
may have also helped. In particular, they barely responded to the surge in the US PPI rate to a new multi-year high
of +4.2% YoY in March (vs. +3.8% expected), as the metric remains heavily dependent on energy prices.
Questions over upcoming US fiscal plans may have also weighed on the USD, while the ramifications of Biden’s
recovery package have yet to become evident. A surge in UST supply is scheduled for the coming weeks, which
could put long-dated yields under renewed pressure, and we doubt that such dynamics would be positive for the
USD. Meanwhile, the USD should keep a very close eye on this week’s flurry of US macro releases. Market
participants may not be too overwhelmed by an expected spike in the US CPI rate for March tomorrow, while hard
activity data are likely to register a strong upturn. The base effects coming from February’s poor weather will play
a key role, while on Thursday the retail sales figures should also benefit from the extra boost given by Biden’s
checks. All in all, the USD may still be able to reverse part of last week’s losses, although we doubt that this week’s
developments could be the springboard for the rally to resume.
LatAm continues to learn to navigate shifts in markets
LatAm currencies have enjoyed some recovery in demand since the start of the quarter after a few of months of
sell-offs. The increased stability in global markets and consolidation in US yields after a fast-paced 1Q21 have
helped, but new bouts like the one seen on Friday could mean retracement and USD resurgence. Shifts in
commodities also lead to FX oscillations and differentiation. Generally, LatAm currencies continue to rebuild some
USD resistances (USDBRL 5.80, USDCLP 735, USDCOP 3700, USDMXN 20.85) and regenerating ranges below
these levels. The trend is reinforced by the shift to moderate inflows after several weeks of outflows from the
region. The rally still has limits, including restrained conviction and the US decoupling, which will likely lead to
more spurts, intermittent USD pressures and a more permanent absence of global and crossover funds. The latest
pandemic wave does not help either, with more deadly variants spreading faster than before, particularly in Brazil
as well as the Andeans and the Southern Cone. The major exception is Mexico, where cases and deaths remain
low. Overall, these developments have had limited correlation with FX performance, but could dampen larger
rallies. Local markets have also brought significant differentiation factors, including Peru’s elections, Brazil’s
inquiry commission on government conduct during the pandemic and the 2021 budget entanglement, Chile’s
pension fund withdrawals as well as Colombia’s tax reform.