OVERNIGHT NEWS
* US 10y yield off 0.689% high after strongest refunding demand since May 2016, rise in July core US CPI biggest since 1991
* Day ahead: US initial jobless claims, 30y UST concludes refunding; Banxico forecast to cut rates by 50bp; Czech CPI
* France 2Q mainland unemployment rate decreased from 7.6% to 7.0%, figure does not include people who are unable to search for work because of confinement
* Australia July employment +114.7k, full-time +43.5k, unemployment rate inches up to 7.5%, participation rate climbs to 64.7%
* Nikkei +1.8%, EUR 10y IRS unch at -0.19%, Brent crude -0.4% to $45.2, Gold -0.8% at $1,932
Banxico: 50bp cut today? CPI within 2%-4% target range
Summer markets prevail, with limited conviction and momentum overnight. In such an environment, EURUSD is marching higher with no obvious reason, but USD weakness is selective outside of Europe. Price action in rates and equities point to low conviction markets. Jobless claims, Fedspeak and Huawei headline risk may attempt to break the monotony today.
Outliers can be explained by local drivers. NZD underperforms G10 peers after the RBNZ reinforced its dovish message, while the government tries to contain the latest Covid-19 outbreak. CEE currencies benefit from EUR bullishness and sticky inflation, with CZK the latest to see a CPI beat. TRY and ZAR underperform on local challenges while MXN is the only one of three central banks expected to cut rates today.
Latam update: COP and BRL in focus
Quiet summer markets (and liquidity) yesterday, with small two way flows across Latam EM, with a small bias towards outflows. Offshore flows have overall lacked inspiration and direction and price action seems to be dominated by local flows at the moment.
In COP, Hacienda is still seen on the offer and we expect them to continue their current pace of USD sales (USD1.5bn/month) at the current levels. The total amount of USD sale is definitely significant when compared to the C/A and YTD foreign outflows, but it is barely keeping USDCOP stable for the time being, indicating decent net outflows from local players still. We like to sell USDCOP on bounces given the upside protection from Hacienda.
In CLP, local institutional players were seen selling dollars around the 800 handle and we should expect strong resistance there for the time being.
In BRL, local and foreign investors have been focused on the local headlines following the resignation of two senior members of the Economic team. Guedes did reassure the market yesterday regarding a potential resignation, and repeated how crucial the spending cap was for 2021. Despite that, the BCB had to intervene twice yesterday, for a total of USD1bn. The intervention was somewhat expected above 5.50 given the recent BRL underperformance vs peers, but the fact that they intervened even before we reached that level shows their determination to avoid any spiralling effect. We like to buy the dips in USDBRL but not at the current levels.